How climate change is reshaping real estate and economic geography

Climate change is an economic, affordability, and cost-of-living issue. Cost of living implications were made clear in recent Consumer Price Index (CPI) data released by the Australian Bureau of Statistics (ABS).

In the 12 months to December 2024, the CPI rose 2.4%. Insurance rose 11%.

While it was slowing from a peak of 16.2% in December 2023, the relationship between insurance cost increases and extreme events would suggest we can expect more upward movement following fires in Los Angeles, flooding in Queensland, and fires in Victoria.

As we see stronger impacts of climate change, it’s becoming a housing affordability issue and an economic management issue.

Insurance is a proxy for loss and damage associated with climate change. Loss and damage is what we’re left with when we fail to reduce greenhouse gas emissions (mitigation), and fail to adequately adapt to the impact of a changing climate caused by those emissions (adaptation).

Loss and damage is financial or non-financial costs to human and natural systems. Financial cost to human systems is reflected in insurance premiums.

Extreme weather events – the most obvious being floods, fire, storm surges, hurricanes, etc – are major drivers of loss and damage and rising insurance costs.

Insurance Council of Australia (ICA) data published in the federal Treasury’s Intergenerational Report shows insured losses from natural disasters rising steadily since the turn of the century. Following NSW floods and other disasters in 2022, they reached almost $7 billion for that year.

Forgoing insurance in the face of costs

Australia isn’t alone. A report produced by the US State Department just before the change in administration showed that the US experienced one billion-dollar disaster every four months in the 1980s. Now, there’s one every three weeks on average. In 2024, there were 27 costing US$182.7 billion.

People are increasingly forgoing insurance as costs escalate or insurance is simply not available. The ICA says that as extreme weather intensifies, and populations grow in high-risk areas, the global insurance protection gap widens.

In 2023, it was estimated 38% of global economic losses were not insured, leaving businesses and communities vulnerable and economies weakened.

In Australia, the ICA reported in 2023 that Swiss Re estimates the gap to be 35% and growing.

The insurance protection gap becomes a fiscal issue as those lacking insurance turn to government. Treasury’s Intergenerational Report makes it clear natural disasters are contributing to growing fiscal pressures on all levels of government, particularly through disaster assistance.

Disaster recovery funding arrangements (DEFRA) are a cost-sharing arrangement between the Commonwealth and the states. It doesn’t include other payments such as increased social security payments, foregone taxes and revenue loss due to reduced employment and economic opportunities.

Disaster insurance increasing

Treasury projections show DEFRA disaster assistance could increase up to 3.6 times over the next 40 years – a cumulative $130 billion in real terms, assuming global action to mitigate climate impacts is only sufficient to limit temperature rise to 3°C.

Work by the McKell Institute for the Insurance Council of Australia suggests the total societal cost for Australia of extreme events could be $35.2 billion a year by 2050 if we limit temperature rise to 1.5°C.

That target has almost slipped away. The Global Stocktake released at COP28 pointed to an expected temperature rise of about 2.5°C on pre-industrial levels by the turn of the century – and that was before the US abandoned the Paris targets.

Insurance will impact equity and affordability. The 2023 Shepparton floods illustrated how extreme events impact poorer and more vulnerable members of a community living in properties more exposed to climate risks.

Recent work by First Street in the United States found insurance costs have risen from 7-8% of mortgage costs, to more than 20% of payments, while the New York Times reported that average premiums jumped 33% between 2020 and 2023.

Redrawing the real estate map

Increasing natural disasters, chronic environmental stressors and rising insurance costs are redrawing the real estate map in the US, and creating divergent futures for communities.

Climate-resilient communities attract new residents due to moderate increases in insurance, driving a rise in property values and economic growth. Other regions face a future of declining property values and economic contraction.

Local governments face eroding tax bases just as adaptation needs grow. These shifts, the First State report argues, are not just reshaping housing markets, they’re reconfiguring the economic geography of the US, reshaping patterns of development and migration.

The report anticipates $1.47 trillion of net property losses over the next 30 years due to climate-related risks. Some communities will approach a climate-driven tipping point.

Read more: Four ways we can change our behaviour to adapt to the climate crisis

In Australia, these trends coincide with governments that are already facing serious fiscal deficits due to historical COVID expenses and, in the case of Victoria, exuberant infrastructure expenditure.

This is evident in the dilemma Melbourne faces as it reviews flood zoning based on new climate predictions.

In the City of Yarra, for example, more than 20,000 homes were moved into new flood zones, but there is no capacity to improve stormwater infrastructure. As a result, property owners are expected to literally sink or swim.

These issues will be discussed at the next Green Lab roundtable on Living with 2°C Plus on Thursday, 13 February. The February adaptation roundtable will consider case studies on extreme weather, floods and stormwater systems from the United States, Australia and China. In March, our third roundtable will discuss risks, value and insurance. These roundtables, in conjunction with the International Panel of the National Academy of Public Administration, are open to academics and practitioners. Register here.