The best description of this year’s summer could well be ‘four seasons in one day’, with storms more commonly associated with winter succeeding a baking hot start to June.
In Britain’s crowded housing market, this ever more unpredictable weather has significant future implications for mortgage lenders.
As a nation we are building more homes in marginal areas, and climate change is leaving more of them vulnerable to the weather. One in 20 homes are already at severe risk of flooding, while 4.5 million overheat even in a regular summer.
For those banks lending against such homes, the consequences of climate change over the coming decades could have significant ramifications, and understanding the true lending risk is often very difficult.
Taking just flooding into account, around 20% of UK housing stock is vulnerable to some extent, but just a quarter of those are at high risk.
There is also the issue that the risk is not static. The scenario in which the UK takes no new action against climate change triggers a 1% increase in the proportion of vulnerable housing stock, that’s equivalent to 300,000 homes. A significant chunk of many portfolios, and something important to bear in mind for both lender risk profiling and consumers borrowing.
Understanding the degree of risk is very tricky, as it is highly nuanced; two properties in the same postcode might well have a difference in elevation of tens of metres, while a single location can be subject to different types of flooding and affected by the differing protection zones afforded by different flood defences. And that’s just flooding; what about subsidence, overheating, energy efficiency, changing regulation?
As a result the PRA is demanding that lenders have increasingly precise data on which properties are at risk, and that lenders must be able to quantify that risk. A simple postcode or regional assessment will not cut it; the data must be granular, driving down to an individual property level.
The data must also be wide-ranging; is the property at flood risk from sea water, rain water or coastal erosion; is an event likely to be fluvial (caused by a body of water overflowing) or pluvial (caused by severe events irrespective of local bodies of water)?
All risks that until this summer’s devastating floods across Germany will have felt remote for many UK lenders, but are now a real concern.
The data, analytics and automated valuation market has an increasingly important role to play in helping assess such risk. Within our own firm we’re already supplying third-party climate change risk intelligence on energy efficiency, flood and ground risk modelling to lenders such as Leeds Building Society.
Strong risk intelligence like this is helping lenders to make informed, pragmatic decisions, understanding and assessing the scale of the risk and protecting both themselves and consumers.
Taking a proactive approach to climate change risk modelling today will set every lending portfolio up for success tomorrow. Mortgages, like all secured lending, have historically incurred very low levels of non-payment and debt write-offs. However, as climate change risk increases, it will be ever more important to isolate the impact those risks have on the property on which the debt is secured.
Awareness works both ways; homeowners have a key role to play in helping the UK reach its climate targets. It is very likely that there will be further enhancement to minimum energy efficiency standards for new-build and rental properties, so we expect to see lenders supporting homeowners through green mortgages and specialist loans to renovate properties to reduce their carbon footprint.
Savvy lenders should recognise the potential for retrofit loans to grow their lending balances while helping energy inefficient homes step up to future standards. Where upgrade costs are significant, the loan structure could follow the ground rent model of leasehold properties, with today’s energy efficiency improvements paid for in relatively small payments over the next 30 to 50 years.
Returning to my introduction, and just in case you hadn’t already spotted the Aussie rock allusions, ‘don’t dream it’s over’; when it comes to adapting your mortgage risk to the challenges climate change will throw at us as an industry over the coming decades I am confident that working together as an industry with stronger market intelligence and smarter products will keep us all safely and affordably homed, whatever the weather.
