'The first thing buyers ask us' - Flood zones pose hazards for insuring homeowners

From Checkpoint, 5:28 pm on 2 November 2022

People who own homes in flood zones might see their property values sink, according to the Reserve Bank. 

It has found up to one in four Auckland houses with mortgages are in areas with flood risk - and suggested banks could tighten their lending criteria in those places.

The findings are part of "climate-related stress testing" the Reserve Bank undertook ahead of its November 2022 Financial Stability Report.

It asked the country's biggest banks to measure how much of their mortgage portfolios are exposed to sea level rise - specifically between 20 centimetres and 1 metre of sea level rise between 2040 and 2100. 

"In Auckland, we found that more than a quarter of the banks' mortgage lending was in the flood zone. 

"This is equivalent to around 12 percent of their total mortgage lending at a national level, under a severe climate change outcome," the Reserve Bank said.

Banks could position themselves to avoid being exposed to those risks over time, it said.

"For example, by tightening lending requirements in high-risk flood zones, it also gives banks an opportunity to work with existing customers to manage and mitigate risk."

Reserve Bank manager of financial system analysis Chris McDonald said those recommendations came with a matter of urgency.

"Even though the scenarios are forward looking, I think because the banks are lending for 30 years banks need to start considering risks sooner than that. Very soon, in fact."

A search of TradeMe Property suggested house buyers were also gradually adding flood risk to their checklist, with the words "flood free" and "out of flood zone" now appearing on dozens of listings.

Flooding in Blenheim earlier this year.  Photo: RNZ / Angus Dreaver

Summit Real Estate's Glyn Delany said Nelson's property market had definitely been impacted by a deluge that struck in August.

"Especially out of town buyers. The first thing they ask us is 'has the property been affected the recent weather and the flooding, landslips, et cetera?'

"There has been a number of areas affected worse than others. Even locals are shying away from areas that are prone to flooding and landslips." 

Victoria University Economics of Disasters and Climate Change chairperson Professor Ilan Noy said the key concern for many house buyers was whether they would qualify for insurance.

That could affect their commitment to their bank.  

"So if insurance retreats from an area because they decide that the risk is too high, for whatever reason - maybe they have a new model that suggests it's too high, maybe they realise that climate change has caused the risk to be higher than what they're comfortable with, or their models are just better - insurers can decide not to renew your insurance. 

"And then you are in technical default of your loan."

The Reserve Bank's report warned house prices were unlikely to capture "potential changes in insurance behaviour" yet. 

It said owners may see a fall in property values in flood zones "as we gain an improved understanding of the risks and this is priced into the housing market."

Noy said people living in coastal areas were generally prepared for their RV to decrease.

However, the problem was many of them were also unwittingly risking an overnight plunge in house value, he said.

"They say I love my house, therefore once I see it declining I might eventually pull out or move somewhere else. 

"But a lot of the time those changes are not that gradual. They are abrupt ... literally overnight. 

"A big event happens or you get a letter from your insurer saying 'sorry, we're not renewing your insurance'."