The risks of living near the ocean

Would you buy a house that might flood in the future, and how much would you pay for it? Eloise Gibson talks to the researchers working out the effect of sea level rise on property values – and who should bear the burden.

Belinda Storey, like most of us, likes being near the ocean. As a specialist in climate risk, she knows that things aren’t looking good for homes on low-lying parts of New Zealand’s coast. Yet, as a living, feeling human, she can't let go of her love for the seaside home her dad built.

The family holiday home is at Cooks Beach, on the Coromandel Peninsula, in the slowly-unfolding risk zone being created by rising sea levels. “My dad milled the timber and then built the house, so I have this really intense emotional attachment to it, even though I know the science and I know the risk,” she says.

Unnatural as it seems to many ocean-loving Kiwis, at some point, being too close to the sea might be viewed as a downside when it comes to valuing a property. Rising seas will raise the “base” for future storm surges, pushing water further inland and increasing the chances that a low-lying coastal property will experience a flood during any given year.

At some point, banks, insurers, road-builders, pipe-maintainers and the people fixing the electricity wires will probably withdraw from offering their services to the worst-hit neighbourhoods because it won’t be worth the cost of frequent repairs.

The question is, when?

Storey’s research focuses on insurance, because, she reasons, it will probably be retreat by insurers, banks and property-buyers that eventually forces coastal homeowners to adapt to rising sea levels. So far, governments around the world have intensely resisted coming up with adaptation plans, so she’s decided that meaningful change may end up being prompted by decisions in the private sphere.

Insurance affects lending because, without an insurance policy, people will find themselves in breach of their mortgage contracts. Even if the bank chose not to foreclose, it would be tough to sell a house to a new owner if the buyer couldn't borrow, Storey says.

While insurers know more than almost anyone about the financial risks that are posed by climate change, they are not obliged to warn their policy-holders before they withdraw cover.

“The insurance industry is very well-informed of the risk and they have very sophisticated internal models,” Storey says. “[But] they provide policies for 12 months at a time so, at any time, once your policy expires, they are able to say ‘I’m terribly sorry but we won’t be renewing your policy’.”

Storey is trying to give people a better heads-up. As a principal investigator with the Deep South National Science Challenge, she is trying to calculate how bad the risk would need to be before insurers would refuse to cover a home, or drastically hike excesses or premiums.

A hike in excess can be enough to practically remove insurance cover: In Christchurch’s Flockton basin, properties at very high flood risk were given a $10,000 excess on flood claims until the council completed expensive flood protection work. That would have left people who couldn’t pay the excess effectively uninsured, Storey says.

While it’s tempting to think that the risk is far-off, seas that were just a few centimetres higher would dramatically heighten the flood risk in some places and reduce people’s chances of getting insurance, she says. “A lot of people focus on, when does the probability [of flooding] become an annual event, or a daily event, but that is not the most important question,” says Storey. “The most important question is, when does it reach that insurance threshold?”.

Short-term thinking

Insurers don’t know yet when or where they’ll withdraw from our coastline, says Tim Grafton, the head of the Insurance Council.

Even if companies could foresee their own future underwriting policies, those policies would be trade secrets because insurance companies keep their risk models secret from their competitors. Meanwhile, the flood risk is changing.

“We don’t have any precision on what will happen in 50 years’ time, all we do know with certainty is that the sea will rise. We are not sure by how much and we know the level will vary in different locations within New Zealand,” Grafton says. “[Insurers’] own profile of properties will have considerable variation from today to 30-40 years’ time, and we have no idea what the aggregate exposure [to coastal flooding] will be.”

Grafton says people shouldn’t expect their insurer to signal long-term risks. That kind of planning is up to governments, councils, property owners, and their banks, he says.

“The answer lies in everybody being aware of the risk, from the owner saying, ‘I want to take out a 30-year mortgage in this risk-prone area and the bank saying ‘do I want to give a mortgage for 30 years?’,” he says.

“Insurance has never been for the life of a house, it is always renewed on an annual basis…The idea that a policy can signal the risk in 40 years’ time is just not possible.

“The legitimate question to be asked of every city council is, ‘what are you going to do for your citizens given that in 40 years’ time there’s going to be this kind of scenario? It’s not to turn around and say, ‘let’s look to the entity that is underwriting the risk for the next 12 months and ask them to solve this problem’.

“The onus is on councils and decision-makers, to look at how we reduce that risk to make [insurance] affordable and available to everybody in the future.”

Making policies short-term allows insurers to calculate financial risk much more accurately, helping keep premiums down. But it also means a company can withdraw from a property quickly if the odds of flooding change. As Storey points out, so far, governments haven’t stepped in to ease the uncertainty.

That is why Storey is formulating some guidelines.

Working with a team at Victoria University in Wellington, she is piecing together equations based on what is known of our coasts and the insurance industry, and the likelihood and severity of flooding. Over the next 18 months, she’ll use coastal elevation maps and storm-surge data from NIWA to try to work out when insurers might retreat from an area.

Early indications are that houses might lose access to insurance somewhere between a one-in-50-year probability of flooding (when Storey says some people may lose insurance or face big hikes in their premiums) and a one-in-20-year probability (where she thinks getting insurance is probably unlikely). However Storey says those scenarios are still being tested. The likely damage from a flood would need to be worse than a soggy lawn. “It needs to be a significant cost, say 30 percent or 40 percent of the value of structure, for example,” she says.

One thing is blatantly obvious already: the thresholds are probably going to be reached much sooner than many people realise. Take the flooding frequency tables in the Parliamentary Commissioner for the Environment's sea level report. Storey: “If you look at [parts of] Wellington, with just 10cm of sea level rise from today, you’d go from a one-in-100-year flood event, where you would be insurable, to a one-in-20-year event, where we believe you’d be very unlikely to get insurance. That sea level rise is locked in regardless of the different [emissions] scenarios. Even small changes increase the reach of existing storms and change the probability.”

“We have a history of generously stepping up in times of national emergency and helping people in need. But making that just an informal tradition is actually contributing to the uncertainty that we are all suffering under and that we’re all going to pay for.”

– Lisa Ellis

Storey is one of several Deep South-funded researchers who are looking for answers to urgent questions, such as who’ll sue whom to try to recover the rising cost of property damage, and who’ll probably win. A project on the legal implications of rising seas is in its very early stages, but another project, looking at the ethical issues of sea level costs, is already underway.

Lisa Ellis, from the University of Otago, is looking for guiding principles that New Zealanders could apply to decide who should pay when people’s homes become uninhabitable. She’ll write a paper during the next six months, drawing on common New Zealand values and examples of solutions from other countries. “It has to be something that’s perceived as fair,” she says. “It’s possible that we, as a society, could decide we need a whole new institution to deal with this, similar to the EQC.”

Others that may bear some or all of cost are homeowners, taxpayers, ratepayers and insurers.

Ellis doesn't know yet what a fair solution looks like. But she can confidently say that the delay in deciding is raising the costs for everyone. Right now, people are making new coastal investments when the country hasn’t collectively decided who – if anyone – will pay if their properties flood.

New Zealand's admirable habit of helping people out of trouble tends to give off the impression that the Government will step in if people find themselves under-insured, but nothing has been formalised, Ellis says. The fuzziness gives people who are investing in property an incentive to “play chicken” with the Government, she says.

“We have a history of generously stepping up in times of national emergency and helping people in need,” she says. “But making that just an informal tradition is actually contributing to the uncertainty that we are all suffering under and that we’re all going to pay for.

“If you’re not sure what your role is versus the Government’s, you have a perverse incentive to hope – and when I say hope, I mean externalise your cost onto the general ratepayer and taxpayer. We shouldn’t be surprised if people are accelerating their coastal development plans, even if they have an inchoate intuition that it might be a bad idea.”

One thing Ellis will consider is whether people building new coastal homes today, knowing the sea level risk, should, in fairness, be treated differently from people who’ve lived near the water for ages. Usually, she says, society helps people who are hit by unforeseeable disasters. But we know sea level rise is coming.

A new type of lease with nature

One virtual certainty is that New Zealanders will continue wanting to live and play near the ocean as long as they can. That’s why Storey, the insurance researcher, is working on a second project, to find a way to value homes that may only be inhabitable for a limited time.

She’s already built a valuation model; now she’s in the process of applying it to the New Zealand housing market. Essentially, the formula treats freehold titles in the risk zone as if they were leasehold titles, “except,” she says, "the lessor is not a person or organisation, it’s nature”.

“Property effectively has a time limit on it now,” says Storey. “[But] the value won’t go to zero immediately, because there will still be people who want to live, work and play at the coast, even if those risks increase.”

Using her analysis, the day the “lease” is finished is the day when the property will likely lose its access to vital services like lending, insurance, or properly maintained roads and water pipes. It might not be insurance that withdraws first, she says. “If the road to your property is repeatedly washed out, and the council eventually says ‘we can’t keep repairing it’, then that will impact the value. Or if the council reaches a point where they say, ‘we can’t justify continuing to repair the pipes and wires to a property’.

“All of those happen well before you get to the water at your front door at every high tide, and well before your house is completely eroded.”

Until then, people may well choose to enjoy the land. Just as long as they check the odds. Researchers like Storey and Ellis are trying to make sure people go in with their eyes open, knowing who’ll pay if the ocean comes to claim their home.

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