Housing and the politics of climate adaptation: a macrofinancial approach

Climate change poses growing risks for housing systems across Europe. Do these risks lead stakeholders to mobilise for decarbonisation? As data from the Dutch housing sector shows, not all owners of climate-vulnerable assets share an interest in decarbonisation. Rather, they have a much more ambiguous set of interests. Property owners’ interest in maintaining asset values conflicts with the financial sector’s interest in better disclosure of risk.

This paper adopts a novel macrofinancial perspective to understand how climate damage affects asset owners and how they organise in response. By focusing on balance sheet structures, the authors provide new insights into the makeup of distinct housing constituencies and the financial interests that guide political strategies. In doing so, the paper puts forward a systematic analysis of how climate-related economic interests in the housing sector reflect funding constraints, indirect exposures, collateral values, disclosure requirements and public backstops.

Key points for decision-makers

• The real estate sector is highly vulnerable to climate-related damage, particularly in areas vulnerable to soil subsidence, flooding and other impacts of extreme weather.
• Yet asset owners in the Dutch housing sector disagree on how to approach climate adaptation.
• Property owners would prefer policy options that mean they do not have to pay for losses incurred themselves.
• The financial sector regards well-measured climate risks from small exposures as a business opportunity.
• Housing ownership in the Netherlands is high, with owner-occupation representing 57% of the stock. As owners pay down their mortgages, they can build wealth from which they can pay for losses caused by climate damage. Nonetheless, an incipient coalition of climate-vulnerable real estate owners is pushing to transfer climate-related losses to the public balance sheet.
• While the Dutch housing system is particularly vulnerable to climate-related financial risks, the costs of these risks are foreseen to be manageable: insurers have the financial capacity to absorb expected claims, while the costs that banks incur from climate damage to houses (via borrower defaults on mortgages) are limited by property owners’ substantial net housing wealth, which far exceeds expected climate damages.
• Similar risks are likely to cascade through other countries’ housing systems via interlocking balance sheets, given that these systems also depend on mortgage finance, investors and international finance.
• This will create similar but distinct political dynamics in different countries.
• Owners of climate-vulnerable assets seek to protect those assets, not the planet.