Economic markets still largely ignore climate change. If they recognize the risks, the next global housing crash could begin.
Niklaus Vontobel / ch media
“The Next Real Estate Disaster.” The British magazine The Economist warns its readers of the threat that global warming represents for our homes. In short: the world risks facing $25 trillion in damages, which begs the question:
The climate has already changed — and the world with it. Sea levels are higher, extreme weather phenomena are more frequent and more intense. Extremely heavy rainfall is 9 times more likely in Europe today than in pre-industrial times because the air is warmer and therefore absorbs more moisture. Heat waves are 150 times more likely.
The way in which these extreme weather phenomena damage buildings is already well known, for example in the United States or Australia, where storms and forest fires are increasingly frequent and intense. London, on the other hand, is hit unexpectedly. There, the clay on which around 40% of housing is built is drying out and the ground is sinking, affecting 1.8 million homes.
It’s going to be expensive, but repairs aren’t the only problem. Owners are also called upon by governments to help fight climate change or mitigate its consequences. Low-carbon heating and cooling are becoming mandatory, as are energy-efficient buildings. So, climate change is costing homeowners more and more.
The exact cost remains an enigma. However, MSCI — a company that creates financial indices — dared to make an estimate.
Institutional investors, such as pension funds or insurance companies, could thus lose nearly 9% of their total real estate portfolio. If all apartment buildings in the world were affected equally, the bill would be $25 trillion.
Summers dangerous for health
Switzerland is not an island facing climate change, as Marius Zumwald explains. He received his doctorate from ETH Zurich and later co-founded the start-up Norm Technologiesspecializing in the relationship between climate change and real estate. In each country, the consequences of climate change are different, the greatest real estate risks in Switzerland are linked to heat and heavy precipitation.
Heat has a particularly strong impact where residential real estate is concentrated, i.e. in towns and cities. It is several degrees warmer than in the surrounding rural areas. There is too few trees to cool the air and too many concrete roads and squares which store heat from the sun and warm their environment.
Marius Zumwald explains that summer is therefore becoming increasingly difficult to bear in many city apartments. Few buildings have active air conditioning capable of preventing a rapid rise in temperature. So it can be up to 30 degrees, even at night. From a health point of view, the mercury should not exceed 24 degrees when sleeping.
However, these summer sufferings have so far had no impact on rents. According to a Swiss Life study carried out in collaboration with the start-up Norm Technologies in 2023, warmer apartments are not rented at lower prices. So, warmer apartments are not considered less attractive, and therefore the heat has not yet destroyed their property value.
And the explanation is simple: people looking for accommodation have no choice but to take apartments that are literally unlivable in summer. Otherwise, they find nothing at all, especially in the cities. Owners therefore rent these accommodations without reducing rents or installing cooling systems.
Courts could impose rules
If competition has no effect, perhaps Justice will act. Indeed, owners are already required to guarantee a minimum temperature today — so why not a maximum temperature?
Marius Zumwald believes it is possible that a court could set a precedent by prescribing what constitutes an acceptable indoor temperature. In this case, owners or tenants would have to pay for the cooling. According to his estimates, the annual electricity bill would increase by 0.5 to 2.5 billion Swiss francs.
A second risk is heavy rainfall, which causes flooding and surface runoff. In this case, the rain does not seep onto the sealed surfaces, but continues to flow until it finds an exit – for example, through the windows of an apartment or a cellar. As mentioned in a report from Wüest Partnersurface runoff and flooding are considered the “costliest natural disasters in Switzerland”.
Like heat, heavy rainfall can cause more damage in cities than in the countryside, simply because there are more things to destroy. And just like against the heat, Swiss cities are also poorly protected against heavy precipitation. On the contrary, many have become more vulnerable over the years by recklessly concreting, asphalting and building on the land.
Real estate at the heart of the main financial markets
Globally, the looming bill from climate change is enormous — so enormous that it could not only upend the finances of individual homeowners, but also have serious consequences for the financial system.
Real estate is the world’s largest asset class, accounting for approximately two thirds of global wealth. This makes houses and apartments “the heart of many of the world’s major financial markets.” Indeed, these real estate assets are encumbered by mortgages which, in turn, support the banks’ balance sheets.
But climate change is still often overlooked. In the United States, for example, real estate is booming, even in regions where the danger of sea level rise is evident. If we look at the price development, we can only draw one conclusion: investors are not very worried about the risks of climate change for real estate.
However, history shows that tranquility can very quickly turn into panic. If banks and mortgagors suddenly realize that their real estate holdings are not worth as much as they only recently thought, a wave of price adjustments could ripple through markets. Public finances could also be strained if property owners seek help. In short, climate change could trigger the next global housing crash.
Translated and adapted by Noëline Flippe
