RBA finds 3.5 per cent of homes already ‘high risk’.
This doesn’t include all of the homes that haven’t yet had their values affected.
As many as 254 suburbs can be defined as climate sensitive by 2050.
Homes in coastal and agricultural regions could see a “material decline” in values due to climate change, Australia’s central bank has warned.
The Reserve Bank of Australia (RBA) on Thursday said insurers will start to back away from risky assets which will have a knock on effect on house prices in those areas.
That’s largely due to the potential for a small share of houses in extreme weather regions to experience sharp price falls, triggering cascading credit losses for banks.
While the RBA said the overall losses are “likely manageable” for lenders, specific Australian regions will face material declines in prices.
Some 3.5 per cent of dwellings across Australia are already considered at “high risk” from climate change, RBA economists Kellie Bellrose, Michelle Royters and David Norman said.
However, the key issue is property prices not yet reflecting future climate risk, the researchers added.
WATCH: Three facts about the Australian property market.
“If current values do not fully reflect the longer-term risks of climate change, housing prices could decline, leaving banks with less protection than expected against borrower default,” they said.
The RBA assessed climate change risk by calculating the total cost of increased insurance premiums and maintenance costs for homes in climate-exposed areas and translating that into changed property values and ultimately, shifted loan-to-value ratios.
With this calculation, the RBA found 2.5 per cent of loans - or around 400,000 more loans - would have a loan-to-value ratio greater than 80 per cent.
The riskiest areas are concentrated in agricultural and coastal regions, with the RBA finding there will be 254 climate-sensitive suburbs by 2050 - mostly located on the coastline.
“The risks in these regions could further increase if the affected communities find that access to, or affordability of, insurance becomes a challenge,” the RBA said.
“That is, the technical insurance premium may understate the actual rise in premiums, particularly if insurers become more concerned about exposures to ‘high risk’ regions.”
This in turn will lead to increasing numbers of homes without insurance, and at a higher risk of defaulting.
However, the researchers noted that there were several limitations that could affect their findings.
“The risks to banks' portfolios may be overstated in this exercise because we assume that banks' exposures will not change in the future,” they explained.
“In reality, banks are expected to increasingly incorporate climate risks into their lending decisions (not just whether they will lend on a particular property, but how much).”