How Global Warming Will Impact Real Estate

Waterfront properties are in demand. Some of the most expensive pieces of residential and commercial real estate are near to beaches and lakes. It conjures a feeling of excitement and we all want a piece of it. With global warming, will the tides change? Would these properties go underwater, meaning will they be worth less than the mortgage owing? Toronto Island, one of the most expensive pieces of real estate, is on the verge of submerging. The University of North Carolina Wilmington did a study in 2015 and found that oceanfront property values could drop. With global warming, we are experiencing more floods, hurricanes and forest fires.

As the earth warms, there is more evaporation and heavier rainfall. On July 19th 2013, just within three hours, Toronto was flooded, sending the transit system in disarray. The sewer system could not handle the flow and countless basements were flooded, causing millions of dollars in damages.  The government implemented new measures: changing building codes and installing back flow valves and sump pumps. 

I came across a shopping plaza in Muskoka with over 40,000 sq. feet of retail space. It was situated at the edge of a river which served as a drainage for storm water. The rising water level created a problem. Part of the solution was to install new drains higher up, above the frost line. In the winter, these drains must be heated, resulting in high electricity bills. The cost of maintenance ballooned and transferred to the tenants who eventually relocated. The once thriving plaza became an empty shell resulting in losses for millions of dollars.

The greenhouse effect damages property values near lake front properties that are not on flood zones as well. Ohio State University did a study in 2017 and found that home values near Buckeye Lake and Grand Lake decrease by $152 million from 2009 to 2015 because of inordinate algae growth. Communities in affected areas would lose some of their residences and businesses.  With a smaller tax base, property tax would increase because fewer residences must carry the burden to run the city.

Some property owners are cashing in on the opportunity. They sold their waterfront properties and bought cheaper in-land properties.  A few families I knew sold their lakefront cottages and used the proceeds to buy investment properties in Toronto. It’s a smart move for the future since they got premium for the cottages and premium rent for their investment properties. They are on higher grounds. 

Australia, in December 2019, had a taste of the effects of climate change. The warm weather dried up the atmosphere and created drought like conditions. This sparked a forest inferno and then the heavy clouds came pouring on soil that was too dry to absorb water. Scientist called this “compound extremes” where one climate disaster triggers the next. The financial cost to rebuild skyrocketed and farmers were decimated. With forest fires, would home values on lovely ravine lots decrease in value?

Hurricanes can cause home values to increase. After a hurricane, the cost of building materials climb. With a shortage of properties, rental rates surge and with fewer homes available for sale, home prices increase. Homes that are badly damaged create opportunities for investors who can purchase for little, rebuild and profit. While hurricanes benefit a fraction of people, many families without hurricane insurance suffered.

Insurance cost is on the rise and many insurance companies have disclaimers and high deductibility. Basic home insurance may not cover for floods, hurricanes or any natural disasters. A homeowner may need regular home insurance, flood insurance and hurricane insurance. Review your policy carefully so that you know what you are buying. I recall an incident where the insurance company denied a claim for hurricane because the policy states that “if the hurricane has a name, then the insurance company will not cover the cost.”  

With global warming, people will be concentrated in smaller areas. With population growth and longer life spans, the demand for prime real estate is greater. We may not live to see the full effects of global warming but our future generations will. While we are building wealth and transferring it to the next generation, let us give them a cleaner earth. Let’s do our part.