Last year, Wyatt wrote a terrific issue exploring the US real estate markets that will benefit the most (and least) from climate change.
After publishing, readers asked if we could publish a similar report for other parts of the world.
I know everyone has their own opinions on climate change. But regardless of your views, if you invest in real estate, you still need to know what everyone else is thinking.
Because these trends — or the perception of them — will move markets.
As the impacts of climate change ramp up, many people are on track to lose money in real estate. This is not a prediction about the future; it’s our present reality.
Of course, preparing is about more than just avoiding losses. Real estate markets are shifting along with the climate, and new compelling buying opportunities are sprouting up.
The first half of this issue is free. We’ll explore the Köppen climate classification; the excellent framework for thinking about a city’s climate, and look at the insurance market — which is shaping up to be the real arbiter of real estate values…
In the second half, I’ll show you a few places whose real estate markets may unfortunately be cooked, along with three spots I think would be wise to consider buying for the long-term.
Let’s go on a global property tour 👇
Note: The first half of this issue is free. But you’ll need the All-Access Pass to read the full thing.
Table of Contents
The facts that matter
First, some important context.
More than 80% of net book value and 75% of the floor area of the world’s real estate is estimated to be at high risk from the physical impacts of climate change.
You read that right. The vast majority of the world’s property owners are, on some level, vulnerable to climate change at a physical level.
Now, there are enough doom & gloom headlines out there to feed an army of doomers for decades. But it shouldn’t dismissed even if you’re a property-owning optimist.
1) The Paris goalposts are shifting
The goal of the 2015 Paris Climate Agreement was to limit global warming to below 1.5°C above pre-industrial levels. As of today, all UN member states are signatories.
The problem is, scientists now expect more than a two-degree rise.
2) Extreme weather is becoming more common
Second, extreme weather events are becoming much more common.
These include sea level rise (coastal flooding), inland flooding, extreme storms, wildfires, subsidence, and heat and water stress.
3) The risks from climate change are not evenly distributed
You may know the famous quote by William Gibson:
The future is already here – it’s just not evenly distributed
This quote is about technology, but it’s also proving to be a good way to think about climate change.
Climate change is not a blanket problem — it will impact each country very differently.
The temperature anomalies are already noticeable today:
But climate change is about more than just temperature. And for that matter, it’s about more than just countries.
To really understand the real estate risks and opportunities, you need to zoom down to the city level and look at micro-climates.
And the best framework for understanding micro-climates is through the Köppen Climate Classification.
The Köppen Climate Classification
If you’re a geek, you may have heard of a German scientist named Wladimir Köppen, who classified the world into five climate zones:
- Tropical 🌴
- Dry 🏜
- Temperate 🌳
- Cold 🥶
- Polar ❄️
He then refined each zone along two additional dimensions:
- Seasonal precipitation type ☔
- Level of heat 🥵
The result is a three-dimensional framework to classify the climate of every single place in the world:
For example, where I live (The Sunshine Coast in Queensland, Australia) has a classification of Cfa: Temperate (C), No dry season (f), and Hot summers (a)
This is a very popular classification. Other cities which share the Cfa classification include Sao Paulo, Austin, Shanghai, and Milan:
As you can see, this is a very helpful framework. But it doesn’t stop there.
Recently, Köppen’s work was furthered by another German scientist (these Krauts are everywhere!) called Hylke Beck, who compiled the projected climate model data into dynamic maps to glimpse of how the world is likely to look and feel in 2070.
Based on Beck’s research, the folks over at pudding.cool created what I think is one of the coolest visual essays ever: A look at 70 cities around the world, and how their Köppen classifications will change between now and 2070:
Insurance companies hold all the cards
If you’re a stock investor, you may be aware of the efficient market hypothesis — the (somewhat flawed) idea that all available knowledge is priced into the market price.
In the case of global real estate, an efficient market will increasingly be forced to properly value the new climate risks.
At the end of the day, value points back to insurance.
Insurance is absolutely essential for real estate. It safeguards people’s homes — the most valuable asset they will ever purchase.
If insurance markets fail, large tracts of the world will become uninhabitable. And one could argue they are already starting to fail!
State Farm and Allstate are bailing on the entire California market. They’ve stopped offering insurance policies to new homeowners, and are refusing to renew existing policies.
And that’s mainly due to fire risk. A 2022 study by actuarial firm Milliman estimated 3.5 million American homeowners face a 10%+ home valuation drop once the market starts properly pricing flood risks:
This overvaluation is not unique to the US: insurance costs are suddenly becoming a very big deal for property owners around the world.
In Australia, 1 in 7 properties in ‘high risk’ areas (which includes Brisbane, its third largest city) are becoming uninsurable. Meanwhile, Africa is losing 15% of its GDP growth to climate change.
Global insured losses have been climbing upward for decades:
In a recent post, Home Economics author (and occasional Alts contributor) Aziz Sunderji cited climate change as the number one reason for rising insurance costs in Texas.
What’s interesting is that many of the areas with skyrocketing insurance rates are the same places experiencing the fastest population growth — particularly the south.
So far, higher insurance costs haven’t hampered the flow of Americans moving to disaster-prone areas like Texas. But as insurance becomes more costly—or outright unavailable—we should probably expect this to change
– Aziz Sunderji
Around the world, insurers are facing more bad years than good years. Since extreme weather events are on the rise, insurers are losing money, even in states that were once considered “low-risk.”
Like so much else with climate change, humanity is kicking the can on addressing this inconvenient insurance apocalypse:
One way to manage this situation would be to allow insurance companies, which are good at evaluating risk, to set their prices as high as the actuarial tables tell them they should be… …But this would be much too messy, and the uproar from coastal residents and wealthy homeowners and the real estate industry guarantees that no state government would let it play itself out. [States] manage the problem of fleeing insurance companies by trying to stuff policies into state-run “insurer of last resort” firms.
Examples of state-backed “insurer of last resort” companies are California’s FAIR plan, and Florida’s Citizen’s Property Insurance, which even Governor Ron DeSantis admits is ”not solvent.”
The insurance industry knows what’s happening (as does the reinsurance industry, which is experiencing the hardest catastrophe market in a generation), and suddenly finds itself playing a critical role in helping humanity tackle climate change.
In a recent article titled Could Insurance Save the World?, author Stephen Johnston warns of an insurance “doom-loop,” where rising climate risks create “insurance deserts” where properties become uninsurable → causing insurers to pull out of high-risk markets → leading to even higher premiums for remaining homeowners.
On a positive note, it also highlights some novel funding mechanisms the insurance industry could break this cycle.
Regardless of how this plays out, it’s become clear that climate can-kicking is now confronting the cold, calculated, boring reality of insurance risk.
Uninsurability is the first stage of uninhabitability. And insurance companies are at the center of it all.
Which cities will be the winners and losers?
To understand the cities that will be most affected by climate change, you need to understand the temperate zone shifts.
- Some cities are shifting out of temperate zones
- But others are shifting into temperate zones
Unlock the full issue. I’ll lay out the cities that are sitting ducks, and those (few) which are set to really benefit.
Disclosures and holdings
- This issue was written & researched by Simon Turner and Stefan von Imhof.
- Neither author currently has any real estate holdings in any of the loser or winner cities mentioned here.
- Altea has no real estate holdings.
- To read the full issue you need the All-Access Pass