Florida flooding: Will mortgages and markets stay afloat?

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Located in a tropical cyclone zone with low elevation and an expansive coastline, Florida faces numerous climate hazards, including exposure to storm surge and tidal flooding that are worsened by sea level rise, and heat stress due to rising temperatures and changes in humidity. Other unique features include the state’s porous limestone foundation which can exacerbate flooding as water seeps into properties from the ground below and also causes saltwater intrusion into water aquifers, and makes adaptation challenging.

Much of Florida’s physical and human capital is located along its vulnerable coast. Two-thirds of the state’s population lives near the coastline, exposing many of them to tidal flooding, and almost 10 percent is less than 1.5 meters within sea level. At the same time, Florida’s economy depends heavily on real estate. In 2018, real estate accounted for 22 percent of state GDP. Real estate also represents an important part of household wealth for the 65 percent of Floridians who are home owners: primary residences represent 42 percent of median home owner wealth in the United States.

In this case study, we focus on residential property in Florida exposed to flooding from storm surges and to tidal flooding and assess the likely impact both in terms of direct and knock-on effects, for example through housing price adjustments (See sidebar: An overview of the case study analysis).

The effects of climate change could increase over the next decade and beyond

Climate change is projected to exacerbate flooding due to storm surges, precipitation intensity, and rising sea levels that increase tidal (also referred to as nuisance) flooding. For example, the frequency of tidal flooding from rising sea levels is expected to grow from a few days a year to 30 to 60 times per year in 2030 and more than 200 times per year in 2050 for stations near Florida’s coast, according to First Street Foundation.

We consider two impacts from rising sea levels: increased flooding from storm surge and tidal flooding. Based on analysis conducted by KatRisk for this case study, average annual damages from storm surges in Florida’s residential real estate market total $2 billion today, a figure that could increase to $3 billion to $4.5 billion, by midcentury depending on whether the exposure is expected as constant or as seeing some buildup. However, individual counties can see more extreme increases. Examples are Volusia, St. Johns, and Broward counties, which could see their average annual losses grow by approximately 80 percent by 2050.

An overview of the case study analysis

In Climate risk and response: Physical hazards and socioeconomic impact, we measured the impact of climate change by the extent to which it could affect human beings, human-made physical assets, and the natural world. We explored risks today and over the next three decades and examined specific cases to understand the mechanisms through which climate change leads to increased socioeconomic risk.

In order to link physical climate risk to socioeconomic impact, we investigated cases that illustrated exposure to climate change extremes and proximity to physical thresholds. These cover a range of sectors and geographies and provide the basis of a “micro-to-macro” approach that is a characteristic of McKinsey Global Institute research. To inform our selection of cases, we considered over 30 potential combinations of climate hazards, sectors, and geographies based on a review of the literature and expert interviews on the potential direct impacts of physical climate hazards. We found these hazards affect five different key socioeconomic systems: livability and workability, food systems, physical assets, infrastructure services, and natural capital.

We ultimately chose nine cases to reflect these systems and to represent leading-edge examples of climate change risk. Each case is specific to a geography and an exposed system, and thus is not representative of an “average” environment or level of risk across the world. Our cases show that the direct risk from climate hazards is determined by the severity of the hazard and its likelihood, the exposure of various “stocks” of capital (people, physical capital, and natural capital) to these hazards, and the resilience of these stocks to the hazards (for example, the ability of physical assets to withstand flooding). We typically define the climate state today as the average conditions between 1998 and 2017, in 2030 as the average between 2021 and 2040, and in 2050 between 2041 and 2060. Through our case studies, we also assess the knock-on effects that could occur, for example to downstream sectors or consumers. We primarily rely on past examples and empirical estimates for this assessment of knock-on effects, which is likely not exhaustive given the complexities associated with socioeconomic systems. Through this “micro” approach, we offer decision makers a methodology by which to assess direct physical climate risk, its characteristics, and its potential knock-on impacts.

Climate science makes extensive use of scenarios ranging from lower (Representative Concentration Pathway 2.6) to higher (RCP 8.5) CO₂ concentrations. We have chosen to focus on RCP 8.5, because the higher-emission scenario it portrays enables us to assess physical risk in the absence of further decarbonization. (The analyses in the Florida case rely on sea-level rise projections going forward. We have based the analyses on sea-level rise in line with the US Army Corps of Engineers high curve. This is within the range of the RCP 8.5 scenario. See for example, Jevreja et al., 2014). Such an “inherent risk” assessment allows us to understand the magnitude of the challenge and highlight the case for action. For a detailed description of the reason for this choice see the technical appendix of the full report.

Our case studies cover each of the five systems we assess to be directly affected by physical climate risk, across geographies and sectors. While climate change will have an economic impact across many sectors, our cases highlight the impact on construction, agriculture, finance, fishing, tourism, manufacturing, real estate, and a range of infrastructure-based sectors. The cases include the following:

For livability and workability, we look at the risk of exposure to extreme heat and humidity in India and what that could mean for that country’s urban population and outdoor-based sectors, as well as at the changing Mediterranean climate and how that could affect sectors such as wine and tourism.
For food systems, we focus on the likelihood of a multiple-breadbasket failure affecting wheat, corn, rice, and soy, as well as, specifically in Africa, the impact on wheat and coffee production in Ethiopia and cotton and corn production in Mozambique.
For physical assets, we look at the potential impact of storm surge and tidal flooding on Florida real estate and the extent to which global supply chains, including for semiconductors and rare earths, could be vulnerable to the changing climate.
For infrastructure services, we examine 17 types of infrastructure assets, including the potential impact on coastal cities such as Bristol in England and Ho Chi Minh City in Vietnam.
Finally, for natural capital, we examine the potential impacts of glacial melt and runoff in the Hindu Kush region of the Himalayas; what ocean warming and acidification could mean for global fishing and the people whose livelihoods depend on it; as well as potential disturbance to forests, which cover nearly one-third of the world’s land and are key to the way of life for 2.4 billion people.

Rising sea levels also increase the damage caused by “tail” events in all counties. Florida’s real estate losses during storm surge from a 100-year event are expected to be $35 billion today and projected to grow to $50 billion to $75 billion by 2050. For Miami-Dade, the expected damages from such a tail event could be about 10 percent of total market value, about 30 percent in Lee, and about 20 percent in Collier. To put the likelihood of such a large loss into context, in the lifetime of a 30-year mortgage, a 100-year event (that is, an event with a likelihood of 1 percent) has a 26 percent chance of occurring at least once. Finally, the level of losses that are observed during today’s 100-year event are projected to become more frequent; by 2050, such losses could happen approximately every 60 years, that is, almost doubling the likelihood of such an event (Exhibit 1).

Losses from an event with 1 percent annual probability in Florida could grow from about $35 billion to about $50 billion by 2050.

Knock-on effects could be even more significant than the direct impact of flooding

While the Florida residential real estate market remains robust today, climate risk poses a potential threat to asset prices. There are several ways this could occur although it is difficult to know the timing and magnitude of impacts:

As buyers experience flooding, prices of affected homes may adjust: According to First Street Foundation, properties exposed to flooding have on average seen a 3 percent price discount compared with similar unexposed properties while properties exposed to disruptive flooding—where more than 25 percent of a property lot or nearby roads are flooded—on average have lost 11 percent of their value. This has already resulted in a total devaluation today of $5 billion of affected residential properties in Florida compared with prices of unexposed homes. Going forward, more homes will be exposed to tidal flooding, and those exposed to disruptive flooding are also expected to increase. About 25,000 homes in Florida already experience flooding at frequencies of more than 50 times per year (almost once a week on average). With rising sea levels, 40,000 coastal properties representing about $15 billion of value could run this risk by 2030, and 100,000 properties worth $50 billion in 2050. These properties may see resale prices drop significantly due to severe and frequent flooding, even falling to zero if there are no prospective buyers. Putting this together, we estimate that the projected increase in tidal flooding frequency and severity could result in a $10 billion to $30 billion devaluation in exposed properties by 2030, and $30 billion to $80 billion by 2050, all else being equal (Exhibit 2). By 2050, the average impact of affected homes is expected to increase to 15 to 35 percent, up from 5 percent today.

Real estate buyers may price in expectations of future climate hazards: Home prices may be influenced not just by today’s level of hazard, but also by expectations of how hazards could evolve. The resale potential, maintenance costs, and comfort and convenience of a home in the future are all factors buyers consider. Once buyers become aware of and price in expectations of future hazards, home prices may adjust in advance of significant climate-induced property destruction or flooding-related inconvenience. For example, homes adjacent to properties that are frequently affected by tidal flooding or storm surges could see prices drop as prospective buyers grow concerned. Other effects could also exacerbate the price impacts described here. If public infrastructure assets are affected, for example from frequent flooding, that could reduce the desirability of entire communities.

Insurance premiums and availability for homes in high-risk areas may change: Real estate prices reflect expectations of the future and often extend beyond a single decade; mortgages are typically set on 15- or 30-year time horizons. Conversely, insurance premiums are repriced annually. If premiums grow accordingly with the projected average annual loss (about 50 percent by 2050), the average annual premium could increase by about 50 percent from $800 to $1,200, with high-risk properties seeing a much higher jump. Such a hike could further affect future property values. If home buyers factor increased premium contributions into a home’s current value, this could cause a decline of about $3,000 in the average value of a home, or a statewide devaluation of about $5 billion. Impacts could be much higher for homes in high-risk areas.

The impact on real estate prices would directly impact local government tax revenues, potentially affecting financial resilience. For example, if homes that flood more than 50 times per year are abandoned, that could correspond to 4 percent of forgone property tax revenues by 2050. Our estimates suggest that the price effects discussed above could impact property tax revenue in some of the most affected counties by about 15 to 30 percent (though impacts across the state could be less, at about 2 to 5 percent).

How long commercial financing and insurance provision will remain viable in parts of Florida prone to climate hazards is unresolved—but it could likely occur in advance of the physical risks themselves manifesting. One shift that could trigger changes in financing and insurance provision is if the likelihood of mortgage defaults increases with intensifying climate hazards: damages from extreme events may cause financial distress for home owners, and even home owners and buyers who are not financially distressed may depress property values through a mix of shifts in buying and selling behaviors as well as potentially strategically defaulting if their homes fall steeply in value and are not expected to recover. As lenders and insurers start to recognize these risks, they could shift their willingness to hold these risks on their balance sheets—or might reprice that risk accordingly.

While there is considerable uncertainty about the knock-on effects of intensifying climate hazards, one consequence of climate change in Florida is becoming increasingly clear: home owners and taxpayers may bear more risk than they realize. While home owners can insure against the direct damages of flooding, they cannot insure against property devaluation. Prospective home owners could also be affected, as banks may stop providing 30-year mortgages in high-risk areas. Finally, with the state and federal governments often subsidizing premiums and needing to finance adaptation measures, taxpayers could be affected.

How can Florida manage the risks from climate change?

As communities recognize the threat of climate change, this is spurring adaptation efforts across Florida. For example, in 2019, the county and the cities of Miami and Miami Beach released a strategy for the area, “Resilient305,” that includes measures to bolster beaches, expand nature-based infrastructure, and identify opportunities to reduce storm surge risk. While adaptation measures should help reduce climate-related damages in the future, they still represent costs today and require funding. For example, beach nourishment has been a regular investment along the coast for decades. Since 1980, some $1.7 billion has been spent on beach nourishment in Florida, nearly three quarters of that total from federal sources. New funding measures are being implemented. For example, in Miami, a new property tax will finance the $400 million Forever Bond to help repay debt incurred on the municipal bond market.

These efforts will need to accelerate. To help Florida manage physical climate risk, policy makers, home owners, and investors should consider strategically what to protect, how to protect (for example, fortifying infrastructure and increasing financing), when to protect, and how to minimize climate risk exposure. We identify a number of steps for consideration:

Increase awareness and transparency of climate change risk. For example: include flood maps as part of online real estate home searches, issue mortgages with 30-year insurance premium forecasts based on increasing flood risk, pledge a proportion of local real estate investment to “climate opportunity zones,” and include climate change risk in interest rate models to both increase bank resilience and be more transparent to home owners.
Build resilience at the local level. For example: strengthen community-based networks and organizations that can provide not only information but also economic and technical assistance to help with adaptation, and an emergency natural-disaster response network.
Accelerate adaptation investment, particularly to assist vulnerable communities. For example, policy makers might consider: how drainage could be improved, where seawalls might be built, whether development should be restricted in vulnerable areas, whether sewers could be upgraded to prevent wastewater from contaminating streets or property, hardening and improving resiliency of existing infrastructure, installing new green infrastructure, whether to introduce incentives to encourage coastal residents to move inland, and how to preserve equity and keep communities intact while discouraging development in areas most susceptible to the effects of climate change.
Decide when and what to protect versus retreat. For example, rising adaptation costs will create real choices about which infrastructure to prioritize for near-term defense. Policy makers, engineers, investors, and community-based organizations could help develop criteria.
Mobilize funds and assistance to vulnerable communities. For example, possible solutions include targeted tourist taxes (as seen in New York City), usage fees for protection solutions, public-private partnerships and federal support, and encouraging private adaptation investment through tax exemptions.

While the state and communities will face hard choices in the face of rising sea levels and worsening hazards, planning today can help manage the consequences and minimize the costs of climate change in the future.

For additional details on these actions, download the case study, Will mortgages and markets stay afloat in Florida? (PDF–1MB).

About this case study:

In January 2020, the McKinsey Global Institute published Climate risk and response: Physical hazards and socioeconomic impacts. In that report, we measured the impact of climate change by the extent to which it could affect human beings, human-made physical assets, and the natural world over the next three decades. In order to link physical climate risk to socioeconomic impact, we investigated nine specific cases that illustrated exposure to climate change extremes and proximity to physical thresholds.