Money talks; BS walks

If there is one thing Australians can relate to its house prices. There is a lot of coastal real estate.

This research discussed below is, to make a pun, “ground breaking”. It shows how a large sample of people are demonstrating their core climate beliefs in the largest investment decision many of them will ever make.

Politicians can say what they like. Scientists should take huge heart from papers such as this because it shows that property buyers and sellers are listening to them.

In my opinion, the most important work that needs to be done in climate change is showing what its impacts will be on the world. We are long past having to prove that climate change is real and we need to be preparing for next year’s battles and not re-fighting the last war.

I’d like to thank Kate Mackenzie director, finance, policy & decision metrics at Climate-KIC Australia for drawing attention to this paper. Way to go.

“Disaster on the horizon: The price effect of sea level rise”

That’s the title of an SLR paper published by Bernstein, Gustafson & Lewis. The headline conclusion is that homes exposed to sea level rise [SLR] sell at a 7 per cent discount relative to observable equivalent unexposed properties equidistant from the beach. This discount has grown over time.

I am mostly just going to quote paragraphs, as it is a well written report and the conclusions come through loud and clear.

“Our first contribution is to show that properties exposed to projected SLR sell at around a 7% discount relative to otherwise similar properties (e.g. same zip, time, distance to coast, elevation, bedrooms, property and owner type), which we show implies very similar time frames for rising sea levels as the medium to highly pessimistic scientific forecasts. This effect is primarily driven by properties unlikely to be inundated for over half a century, suggesting that it is driven by investors pricing long horizon concerns about SLR costs. Moreover, the same discount does not exist in rental rates, indicating that this discount is due to expectations of future damage, not current property quality……Finally, we show that the SLR exposure discount has increased substantially over the past decade, coinciding with both increased awareness and more pessimistic prognoses about the extent and speed of rising oceans. In particular, we document increased transaction volume and lower prices for sophisticated buyers following the significant revisions of the IPCC’s 2013 release, which increased SLR projects and awareness” Emphasis added

Comment: An analyst might suggest that a 7 per cent discount is excessive, given the 50-year time horizon. People overvalue the risk. Still people also overpay on tollroads in the sense that the time saved compared to the toll implies a high value for time and a willingness to pay a premium to avoid inconvenience.

480,000 property sales analysed

“Our main test sample contains over 480,000 sales of residential properties within 0.25 miles of the coast between 2007 and 2016. In our baseline analyses, we define any property that would be inundated at highest high tide with a 6 foot global average SLR to be exposed……. ….We further break this into exposure buckets, with properties that will experience ocean encroachment after 1 foot of global average sea level rise trading at a 22%, 2-3 feet at a 17% discount, 4-5 feet at a 9% discount and 6 feet at a 6% discount.4 Using the long run discount rate provided by Giglio et al. (2014) and assuming complete loss at the onset of inundation, we estimate that markets expect 1 foot of sea level rise within 35 years, 2-3 feet within 45 years, 4-5 feet after 65 years, and 6 feet in 80 years. These results are consistent with the medium to high projections provided in Parris et al. (2012) and utilized by the NOAA in their 2012 report.”

Comment: What a fantastic piece of research. Any investment bank research team would win awards for coming up with this evidence.

At the beginning of our sample in 2007 we find no significant difference between the prices of exposed and unexposed properties. By the end of our sample in 2016, exposed non-owner occupied properties are priced approximately 13.5% below comparable unexposed properties.

Read the entire paper if you want more.