Homes under Water: From Physical to Financial Flood Risk for Real Estate

The real estate sector is increasingly impacted by climate change, with buildings and infrastructure directly affected by more frequent and severe flooding. Rising flood risks threaten property values, business operations, and financial stability, making climate risks a key consideration in real estate investment, development, and planning. In this PhD dissertation, I aim to evaluate the direct, indirect, and financial impacts of flooding on the real estate sector, while also identifying adaptation strategies that can mitigate these impacts. Using a literature review, I found that climate-related disasters affect the financial sector through two main channels: physical impacts and changes in disaster risk perceptions (Chapter 2). Direct physical impacts result in asset, infrastructure, and economic losses that affect the financial stability of banks, insurers, and governments. Meanwhile, the expectation channel describes shifts investor perceptions, leading to uncertainty and market volatility. Post-disaster data collection efforts are rare. For this reason, Chapter 3 presents a broad overview of data collected among households and businesses after the 2021 summer floods in the Netherlands. Based on this data, I develop a multivariate flood risk model and find that flood damage mitigation (FDM) measures, such as placing barriers, building with water-resistant materials, or elevating electrical appliances, can reduce damage by 30 to 40% (Chapter 4). These insights led to the development of new flood depth-damage functions, revealing that existing flood damage models often underestimate flood risk in the Netherlands. Beyond direct damage, flooding causes significant indirect losses for businesses (Chapter 5). Analysis of survey data shows that one meter of water is associated with about 17 days of business interruption. Even firms not directly flooded suffered disruptions due to damaged infrastructure or supply chains. One day of business interruption costs a firm approximately 0.5% of annual revenue. Stronger local connections and timely damage compensation help mitigate these losses and speed recovery. Financial impacts arise when flood damage affects real estate assets serving as mortgage collateral. The banking sector is exposed to climate-related disasters through credit ratings and investment returns. To assess these risks, I developed the Dynamic Integrated Flood Real Estate Impacts (DIFREI) model (Chapter 6). This integrated model combines direct flood risk with real estate market dynamics. Results show that real estate investors are generally resilient to housing market shocks caused by flooding, whether through physical damage or changes in expectations. However, individual homeowners in flood-prone areas may face severe devaluation. If climate change worsens flood risks or protection standards erode, mortgage credit risk and capital requirements could rise significantly compared to current banking models. Adaptation at the building level reduces both direct and indirect damage and mitigates financial impacts. Chapter 7 extends the Dutch survey with data from Germany and Belgium to assess homeowners’ post-disaster adaptation behaviour. Financial, institutional, and psychological barriers often hinder adaptation. Insurance compensation is crucial for enabling rebuilding, while miscommunication about risks and reliance on public protection can reduce private action. Notably, when damage exceeds about 60% of a home’s rebuilding value, homeowners are more likely to relocate than invest further in adaptation. The findings have significant policy implications for improving the resilience of the real estate sector to flood risks. Closer collaboration between insurers and governments can streamline compensation and accelerate recovery. Introducing building-specific climate labels can reduce information asymmetry, integrate climate risks into pricing, and incentivise adaptation. Mortgage lenders can support climate resilience by including flooding in risk assessments and offering favourable loan terms for adaptation investments. Finally, regulatory measures for climate-adaptive spatial development and tailored financial products in high-risk areas are needed to address escalating flood risks and support the long-term stability of the real estate sector.