Practical Applications of Climate Risk and Real Estate Prices: What Do We Know?

Abstract

In Climate Risk and Real Estate Prices: What Do We Know? from the October 2021 Special Real Estate Issue of The Journal of Portfolio Management, Jim Clayton of York University and Steven Devaney, Sarah Sayce, and Jorn Van de Wetering, all of the University of Reading, find that growing awareness of climate risks to real estate has had a sustained, if imprecise, effect on decision-making, including property pricing and lending practices. The authors analyze the connections between property values and extreme-weather events and climate risk. They review existing, often ambiguous, studies on climate risk’s effects on (primarily residential) property values and on associated real estate market activities. They then derive conclusions about how these risks, and perceptions thereof, may affect commercial property markets and investors.

Because much of the existing research concerns the residential market and the mostly short-term impacts on pricing after weather events, more research is needed. Still, there are conclusions that real estate stakeholders can draw from the existing research: Property prices often modestly decline after weather events; climate change might have longer-term impacts on values, often depending on stakeholder beliefs; and sustained risk-mitigating government involvement might limit price declines in areas subject to increased climate risk.