While the New Zealand Government may be dialling back on some of its commitments to climate change, the rise in extreme weather events will likely result in devastating financial disasters for many Kiwis who will find their homes and businesses uninsurable, unfinanceable and devalued.
Meurig Chapman, CEO of Happy Prime, New Zealand’s specialist credit risk which consults to the corporate banking sector, says extreme weather events—now expected every three years instead of 50—could be financially devastating if New Zealand does not act.
“Insurance companies are moving against areas at risk from flood, drought and fire. Premiums will increase drastically, and a vast number of properties are set to find themselves uninsurable. Without insurance, Kiwis will be unable to recover, their mortgages will be called in, and financing will be all but impossible.
“At least half a million homes built on floodplains—such as Dairy Flat in Auckland and some of Dunedin’s nicest suburbs. Property owners in such areas might find themselves unable to sell or have to sell at extreme discounts because banks won’t approve mortgages on the properties.”
Chapman says the Reserve Bank of New Zealand (RBNZ) is concerned about the physical risks to bank asset portfolios. This concern could lead to policies that require banks to hold more capital for areas considered high-risk.
“The RBNZ’s reporting requirements for banks signal a shift towards using banks to influence climate policy. This includes being more selective in climate-related lending. The current aim appears to be to use the collected information for future action.
“The risk of transition is set to rise. The Auckland council is acquiring a substantial number of properties located in high-risk flood plains, with the cost falling on the ratepayers. There's a pressing need for lenders and the government to discuss how to manage assets over the next 5 to 20 years because the valuation of assets directly affects insurance firms and banks. Inevitably, we will see higher costs for individuals with insurance policies or mortgages,” Chapman says.
As a result, Happy Prime is advising clients—which includes several New Zealand banks and lenders—to make sure they understand their portfolio and the risks to that portfolio from an extreme weather event perspective.
“We’ll see more banks and lenders managing down risky properties that fall outside their appetite. There will be a transitional cost, and New Zealand needs to be prepared for it.”
Chapman says several questions must be considered by all sectors and property owners because a joint national effort will be needed to rescue the looming crisis.
There is just not enough cash to cover every vulnerable property in New Zealand. Is it realistic to spread the risk around?
When the Government steps in to save homeowners by backing banks and insurance companies, aren't the real winners the financial institutions themselves?
If the Government does not shoulder the losses, how big is the threat to the stability of our banking system?
There are indications that around 30 per cent of New Zealand’s territory is at high risk of natural disasters like wildfires, droughts, and floods. This is due to factors including warmer temperatures, shifts in rainfall patterns, and the impacts of sea-level rise.
Areas such as Northland and the east of the Southern Alps are likely to see more intense and frequent drought conditions. Rising sea levels are making coastal regions increasingly vulnerable to flooding, and the threat of wildfires is growing in places like Wellington and Marlborough.
“We need to stop lurching from crisis to crisis and take proactive action now,” Chapman says.
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