51ĀŅĀ×

Fire, floods, and finance: the risks aren't priced in

Making sense of the latest trends in property and economics from around the globe

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4 mins read

California residents have long lived with the risk of fires. But the wildfires that swept through Southern California in January 2025 shattered assumptions about how effectively they could be mitigated and how rapidly emergency teams could respond to protect neighbourhoods.

Just a day earlier, wildfires were seen as a high-risk but manageable threat. The destruction of 17,000 structures changed that perception entirely. Many properties became uninsurable, and where cover was still available, premiums surged. This impact was most acute in some of California's most desirable neighbourhoods. The within the Eaton fire zone is valued at $1.3 million; in the Palisades fire area, it's $3.0 million.

New state rules now require insurers to provide cover in wildfire-prone areas, even where they had withdrawn. But the resulting premiums will lock in a lasting loss of value.

Larger crises

It's easy to see how this quickly becomes a threat to financial stability. Capital and property losses from the January fires could reach $164 billion, according to initial UCLA . Extreme weather events are becoming more frequent, raising the prospect that banks and insurers will be hit by larger crises, or perhaps several at once.

Bank of England rate-setter Sarah Breeden some of this out to an audience of commercial property execs yesterday. She noted the ā€œgreen premiumā€ being paid for more sustainable offices, suggesting that some climate risks are already priced in. However, "a sharp reassessment of physical risks or the likelihood of a sharp and disorderly transition, may lead properties that are more exposed to severe weather events or that do not live up to sustainability standards to face a heavier discount."

That echoes the swift and dramatic reassessment of risk triggered by the LA wildfires in January. The BoE is already tracking this in the residential market; its November 2024 Financial Stability Report found that in the most pessimistic climate scenarios, the 1% of properties most exposed to increases in flood risk could lose around 20% of their value. And the potential fall in house prices for the 10% most exposed areas would be, on average, 6.5 times larger than in areas with a median level of risk.

Flood Re, the joint Government-industry scheme that reinsures residential flood cover, has insulated most UK homeowners. But the scheme doesn’t cover commercial properties, 10% of which are located on flood plains. It’s a sharp reminder, Breeden notes, that many financial stability risks are closer than they appear.

Prudent ratios

The BoE published its of risks to financial stability earlier this week and it was pretty sanguine about the near-term risks to both commercial and residential sectors. 

While commercial valuations have adjusted, refinancing risks persist. However, UK lenders have tightened credit conditions and maintained prudent loan-to-value ratios, helping to mitigate systemic risks.

Similarly in the residential sector, arrears have crept up but remain low by historic standards. Around 30% of mortgage holders are still yet to refinance since rates began climbing in the second half of 2021. For the typical owner-occupier mortgagor rolling off a fixed rate in the next two years, their monthly mortgage repayments are projected to increase by £107, compared to £146 at the time of the November stability report.

Broadly flat

The property market is recovering from the distortive impact of the April 1st changes to stamp duty, but higher supply relative to demand is keeping price growth in check.

The headline net balance for the new buyer enquiries in the June RICS came in at +3%. This is noticeably improved on the reading of -22% seen previously, with the demand gauge moving out of negative territory for the first time since December 2024. Net balance refers to the proportion of survey respondents reporting an increase minus those reporting a decrease.

The near-term sales expectations series posted a net balance of +6% (up from -2% last time), which hints at a very gentle recovery coming through over the next three months. That said, the 12-month outlook fell to +5%, down from +25% beforehand, suggesting that respondents anticipate a broadly flat landscape for sales volumes. A net balance of +16% of respondents continue to note that the number of market appraisals conducted over the month was greater than during the comparable period of last year.

House prices were in June, Halifax reported on Monday. That brings the annual growth rate to 2.5%, down from 2.6% the previous month.

In other news...

Rachel Reeves to launch permanent mortgage guarantee scheme ().

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