Real estate and financing, waves in flood zones

In February, the Desjardins Movement made waves by announcing the end of mortgage loans for the purchase of a property located in a 0-20 year flood zone. For the owners of these properties, the impact is severe: an immediate devaluation of their property, and profound long-term repercussions for many families.

But was this decision anticipated? Absolutely. Because the warning signs have been flashing for a long time. Faced with climate disasters that threaten real estate investments, it was inevitable that financial institutions would adapt their policies to safeguard their economic interests.

The pressure posed by climate disasters has the potential to weaken risk pooling mechanisms, which require an adjustment of insurance and financing arrangements to better manage the risks associated with climate transition and adaptation. Inevitably, it is the owners of real estate — owners of individual homes and condominiums — who will feel the financial burden of these changes.

The dangers are well documented: increasingly common floods, devastating forest fires, landslides. We should also not underestimate other threatening consequences such as sewer backups and the increase in droughts, which will inevitably compromise access to drinking water. Despite their variability, these risks weigh heavily on the shoulders of real estate investors grappling with the reality of a changing environment.

For Desjardins, the issues go well beyond minor risks. As the leading damage insurance company in Quebec, the institution knows well that these risks will have considerable effects on its upcoming annual balance sheets. There has been a significant increase in insurance premiums in recent years, a trend that affects the entire sector.

This reality is often sidelined in discussions about the impacts of the climate crisis. The objective of taking out insurance for your property is to protect yourself against disasters likely to damage or destroy them. Naturally, the amount of your insurance premium is determined by the value of the asset and the degree of risk to which it is exposed.

When the risk becomes more frequent or becomes a virtual certainty, insurers adapt their offer. They can either increase premiums or exclude certain risks from their coverage. For example, if you live in an area prone to sewer backups, this may limit your coverage to a specific ceiling, or even make certain protections inaccessible. Practical advice in such cases: avoid storing valuable possessions in the basement!

Disasters such as forest fires, floods and landslides clearly illustrate why insurers are reluctant. In high-risk areas, they often prefer to withdraw. It is then up to the government to provide a safety net, an approach already adopted in certain critical areas in Quebec.

The flood zone review poses a major challenge for the government, given its significant impact on households, banks and insurers. Those responsible are tiptoeing forward, and we can very well understand their caution.

Revisions of urban plans and development schemes will be inevitable in the face of the climate crisis, fueling a caution that is also shared by local elected officials. Let us remember, however, that construction authorizations in these charming but vulnerable areas come from cities and governments. Today, they bear a heavy responsibility, because they are aware of the climate challenges of the future.

In the current context, where private companies can take precedence over public policies, particularly in terms of adaptation to climate risks, it is essential to recall the fundamental role of the government and municipalities in this matter. Unlike businesses, whose primary objective remains profitability, public institutions’ mission is to safeguard the general interest and protect the common good. This distinction is particularly relevant in the face of the climate emergency and the need to review our policies relating to flood zones.

Previously, the pace of change was slower, allowing for gradual adaptation. With the intensification of the climate crisis, this pace has dramatically accelerated, confronting decision-makers with increased complexity. To criticize them would be to ignore the unprecedented challenges they face in their efforts to reconcile public interest and environmental imperatives.

It is imperative to accelerate the process of reviewing compensatory measures and even to anticipate them to prevent other owners from suffering financial setbacks similar to those caused by the recent decision by Desjardins. This situation is only the prelude to other similar upheavals. When reinsurers decide to withdraw from this type of coverage, the consequences could be catastrophic.

In a context where the climate crisis is intensifying and increasing extreme weather phenomena, adaptation is no longer an option, but an urgent necessity. We must act quickly to integrate these risks into our plans and strengthen the resilience of our communities with more agile and responsive processes.

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