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Climate change and the Dutch housing market

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Global climate change has local ramifications. This is particularly so in the case of The Netherlands. Sandra Phlippen discusses how climate change affects the Dutch housing market through three channels of impact: physical climate risks, climate adaptation, and climate mitigation.

Sandra Phlippen is the professor by special appointment of Sustainable Banking at University of Groningen and Chief Economist at ABN AMRO Bank.

Highlights

Image courtesy of interviewee. May 15, 2024

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This video video discusses a comprehensive study focusing on the effects of climate change and the pursuit of energy neutrality in the Dutch housing market. The research examines how physical climate changes, including global warming and natural disasters, interact with policymakers' and homeowners' efforts to create energy-neutral homes.

Key points include:
1. The daunting task of assessing the combined impact of climate change risks and energy adaptations on the housing market.
2. The importance of understanding these impacts from a homeowner's perspective, as multiple risks can occur simultaneously, complicating decision-making.
3. Rising temperatures and occurrences of drought pose risks to homeowners, affecting the productivity of construction and resulting in property damage.
4. Flooding, while a significant concern, is viewed as a lesser risk compared to other climate change impacts in terms of associated costs.
5. Investing in greening homes can mitigate risks from heavy rain and heat stress, while also reducing energy consumption and costs.
6. The current Dutch flood protection measures are deemed sufficient for projected sea level rises up to three meters, but planning for extreme scenarios post-2100 is necessary.
7. The study highlights a financial burden of around €35,000 per low-energy home to achieve energy neutrality, a substantial sum impacting homeowners.
8. There are unequal distributions of costs and climate risks among neighborhoods, with some areas facing combined challenges that could financially strain less resilient homeowners.
9. The need for transparency regarding climate risks at a granular level is emphasized, as well as the importance of ensuring that lower-income homeowners can access climate-resilient housing.
10. Lastly, the potential for financial innovations to help homeowners invest in energy-efficient upgrades in a way that considers the long-term benefits is suggested as a future area of exploration.

The overarching conclusion is that while the challenges posed by climate change and the transition to energy-neutral homes are significant, they may not severely disrupt the Dutch housing market if managed properly. However, careful attention to equitable outcomes and effective planning is crucial.

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We took a quite of a holistic look at, how kind

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of a combination of, climate change.

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So the physical climate change, including global warming,

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but also natural disasters in combination with,

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all the efforts that policymakers, undertaken

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and homeowners therefore have to undertake to become,

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energy neutral.

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And, and we looked at kind of the, the,

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the total picture of what physical,

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climate change, efforts trying to adapt

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to those changes, but also the mitigation

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by investing in energy neutral homes, what all of

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that in its interaction could mean

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for the Dutch housing market.

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And, we realized that this was a really daunting task

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that we're gonna get ourselves into.

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But we were, the, the reason why we wanted to take

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that approach is because we thought, well,

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from a homeowner's perspective, it is very relevant,

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what all of these means in, yeah, in,

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in the context of all

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of this happening at the same time, right?

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Because a lot of studies are looking at, an insulated,

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impact channel, such as physical risk

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and then a specific element on that, on,

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on, on a homeowner.

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But actually from a homeowner's perspective,

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you don't have really the choice to select one

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or, two of these channels of impact.

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It all happens at the same time.

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Climate change is, of course, a global phenomenon.

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Um, we all know the IPCC makes scenarios of,

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what could happen, what is likely to happen.

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Um, we have a Dutch institution,

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meteorological institutions called KMI.

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They translate these scenarios to the Dutch local ground.

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So that gives us a sense.

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We took a scenario of high emissions called 8.5,

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and that gives you a sense of what could happen in the,

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in the, on the Dutch ground in terms

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of physical climate change.

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Now, that is, you have to think about, how

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that affects homeowners.

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Uh, in, in, for example, it, it's getting warmer.

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There are more heat waves that generates heat stress,

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that affects, construction work

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for building properties.

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It also affects labor productivity of people, yeah.

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Uh, living in these economies.

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Um, but you also have to think about drought, for example,

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which is, lowering groundwater levels and

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therefore creating damage to property

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as foundations start to subside.

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Um, that is, that sounds a bit, of course,

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the first thing everybody thinks about is floods.

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That's why I'm also mentioning this last, right?

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But, 60%, it is true, 60% of,

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Dutch GDP is earned far below sea level.

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So, the Netherlands is an extremely flood prone risk.

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Um, but maybe to, to already, say something about,

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about results

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that we found on the flood risk is this is actually the

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least costly risk for the Netherlands

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and for Dutch homeowners,

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there are various things you can do.

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So, depending on

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what risk you're trying to fight, right?

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So if you think, for example, about, yeah,

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the obvious thing, flood protection, that is of course,

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something that you don't do inside the home.

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It's, it's, it's, you create regional

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and primary barriers that prevent, the water, sea water

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or river water from coming in.

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Um, that said, there are also adaptation measures.

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Uh, for example, think about greening the

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outside of your home.

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So what does that do if you invest, in greening the

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outside of your home and municipalities greening the cities?

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Uh, that basically, generates two implications

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for the other channels of impact.

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Because on the one hand, if you green your house,

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you basically, protect yourself for heavy rainfall,

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because soils absorb more heavy rainfall,

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and, cause less property damage from, yeah, houses,

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getting damaged by, by, by water.

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Um, but at the same time,

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it's also preventing against heat stress.

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So every tree

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that's being planted is an air conditioner less.

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Uh, so in that sense, it's also, again,

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affecting the mitigation channel

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because air conditioner use is, a big emitter

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of greenhouse gases.

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So, so adapt, adapt, adapting in terms

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of making your home greener, has both implications

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for lower physical, damage and,

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and the consequence of that to your property,

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but also lower, mitigation problems

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because you, use less air

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conditioning in the Netherlands.

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The, the economy says that, yeah,

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sea levels are rising and it could rise, up to

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around one and a half meter by 2100.

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Um, that is in principle not a problem

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for the Dutch flood protection system.

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Um, even if the sea levels would rise up

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to even three meters, that should not be, technically,

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that should not be a problem for the,

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flood protection barriers.

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Um, that said, there is something to worry about,

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and that is that, you know, the Netherlands is used

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to planning at least 100 years ahead

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for its flood protection system.

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Um, if we look beyond 2100, and that seems far away,

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but it's actually today in terms of starting

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to build protection past 2100.

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Um, the scientists, weather scientists,

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they actually do say

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that more extreme scenarios might happen.

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And, it is not the base case.

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But if they are to happen,

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because for example, of the, more rapid,

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eye sheet melting that we already see going on today,

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that might mean that,

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sea levels are gonna rise much higher.

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And that will mean that we have

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to start thinking today about different scenarios,

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that we could plan for

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and prevent log-ins today in order to be,

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to create optionality from, let's say, 2050 on

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where we have more certainty about these scenarios,

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to be prepared for 2100 and after.

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So that is a kind of a important conclusion of our research.

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Um, and that always gets forgotten

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because it's such a long run thing.

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But, but the first conclusion that we take is that you have

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to start thinking now about more extreme

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scenarios and start planning.

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If you think about the more shorter term until 2100,

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there is not that much of an issue.

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To be honest. The adaptation that is already planned,

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today for future flood protection

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is lowering the total flood risk in the Netherlands.

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ATS not creating more flood risk in the Netherlands.

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That is not to say that there are some locations

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where this doesn't hold.

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So for example, there are locations very close to rivers,

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where, houses are sometimes being built that is not,

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might not be a too smart thing to do in the future.

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So we need to start thinking better about where to build

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and where to not build in the future.

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Um, and, and that creates choices about, yeah,

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where we, where we want to be living

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and building in a country which is already super scarce of,

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building locations

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and land use locations in general, climate mitigation,

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if from the perspective

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of the housing market is basically all about all the

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investments required to make your building energy

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neutral, right?

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So that is, insulation, solar panel installation,

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heat pumps, that all amounts to around 35,000,

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euros from a low energy label home today

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to an energy neutral home in the future.

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So that's, that's, that's, that's a big sum of money.

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And when you compare this to the, to the physical risks

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and the adaptation cost,

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this is actually the most expensive thing, in,

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in comparison to all of them.

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So this amounts to around 2% of Dutch GDP per annum.

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Um, and so that is a big investment.

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There are a lot of hurdles in, in getting buildings

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to energy neutrality that has to do with,

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grid capacity that is, not available.

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Um, it has to do with, labor shortages in construction.

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Um, so, so there are a lot of hurdles,

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which I think a lot of countries are facing today,

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especially, countries that are, that,

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that are basically, operating, above their,

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potential.

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Um, so, so that is an issue,

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but it doesn't have to be a long-term issue.

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Um, the, the, the main thing is that, homeowners need,

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liquidity to make this investment.

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So that's, that's clearly the main hurdle here.

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What are the, the macroeconomic costs associated for,

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getting the Dutch residential real estate,

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climate resilient and, energy neutral?

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And, and then we, we have made an overview

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of the different, costs.

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And, and indeed it is the, the energy neutrality investments

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that is the, the biggest chunk.

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And, then you get the foundation risk, which is about,

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0.2% of, Dutch GDP on an annual basis.

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Um, then you get, flood protection and,

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and the other, elements.

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So, but the big macro story is that

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this is actually,

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not gonna severely disrupt the Dutch housing market at all.

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And one of the reasons of that is that that actually,

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homeowners, have a mortgage resting on, on

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that home that is around, 60, 65%

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of the total property value.

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And so that means the additional financing room to deal

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with these costs is there.

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So that's basically the reassuring first conclusion.

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Um, but there is a big,

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but that these costs are very, unequally distributed.

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And, so one thing that we have done,

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which we included in the study,

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but we did this in my bank separately,

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is we actually took all these different, risk types

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and we, we made them on the level of the neighborhood,

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and we basically started stacking them.

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So we wanted to know what climate risks

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and transition risks are really, potentially too much

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for homeowners in which locations.

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And, and there we find

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that the Netherlands has about 3000 neighborhoods.

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And of these 3000 neighborhoods, there are

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around 90 neighborhoods.

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So 0 9, 9 0, where,

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at least two problems.

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So the transition risk

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and mostly the foundation risks they play at the same time,

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while homeowners are financially less resilient,

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and that means that the property might not, be

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valuable enough to be worth the whole repair cost,

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or it might mean that the income

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of the homeowner is unsufficient to finance that repair.

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So the first thing that needs to happen,

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and it's a bit of a painful thing that needs to happen,

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would be really thing we need to get there, is that these,

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so, so transparency

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of these risks on a very granular level is going

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to make sure that these risks are going

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to get priced into the market.

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So what that means is basically distribution of these costs

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between the current homeowners and future homeowners.

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And what we think is that current homeowners,

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they are better able,

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and it's more fair to, to let them deal, with the costs

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that are known today.

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Because we know in the future we will know more about,

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costs that are probably gonna be, more likely

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to be higher than that, they're gonna be lower.

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And so those,

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that additional information in the future is gonna burden

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future homeowners anyway.

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So our proposal is let us make a clear,

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cut and introduce transparency

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of these risks into the market so that,

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house prices can correct.

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But what that means is that homeowners, who are,

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who are buying a home in a climate vulnerable

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location, they might observe that those prices are suddenly

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lower than they were before,

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before those risks were being priced in.

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And what that means is that, vulnerable homeowners with

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moderate financial means might move towards locations

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because they basically observe that

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that home is now within their range of affordability

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that wasn't before.

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And that is something that, is a second order effect

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that, that creates inequality.

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Because what, what you end up with is that,

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vulnerable people end up in vulnerable places,

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and that, of course creates inequalities into the future.

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And so what we propose as a second order, instrument is

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that the government should think about climate resilient

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locations to make them, as a kind of a, yeah, a,

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a reserved space for financially vulnerable homeowners

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to be able to move to.

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Because what you will get is that, financial, sorry,

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climate, resilient locations will become more scars.

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And so what, what, will happen is

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that they will become more expensive

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and then they will become out of range for these,

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vulnerable homeowners.

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So unless, so if we wanna, so the first thing is to,

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to get this price into the market to deal with these costs.

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And the second thing is to make sure that the movements

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that will happen, as a result of this pricing effect,

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do not lead to additional inequality.

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There's a lot of future research that,

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and research ideas that's coming out of this,

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because this was very broad and holistic.

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And I actually, do wanna say,

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and I, I wanted to say that in the beginning,

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but, this is an initiative of the, chief economist

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and the, and the housing market economist of free banks.

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So it's Rabobank, ING and A. Please get that in there.

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Um, and, and so we, we took this initiative and,

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and we actually think that there's

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so much more to be known here.

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So, one of the, one of the things that, that we think,

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needs to, happen first is we need to get

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to this more granular information

15:10.585 --> 15:12.485
of property level climate risks.

15:12.715 --> 15:14.485
Because of course, the danger is

15:14.635 --> 15:18.165
that if you stay on a neighborhood level, then still,

15:18.305 --> 15:21.765
you introduce risk premia for properties

15:21.795 --> 15:22.885
that are not at risk,

15:23.225 --> 15:27.645
and you might underestimate, risks, in, in,

15:27.825 --> 15:30.605
in properties that on a neighborhood level seem fine,

15:30.605 --> 15:32.165
but individually are not fine.

15:32.505 --> 15:35.125
So that is something that needs to be studied.

15:35.865 --> 15:39.005
Um, but that of, of course depends on data availability.

15:39.545 --> 15:42.485
Um, the other thing that I find personally very interesting

15:42.505 --> 15:43.925
is the interaction effects.

15:44.345 --> 15:48.725
So what, what does, so the example

15:48.725 --> 15:53.085
that we started with, so if you, for example, invest in,

15:53.405 --> 15:54.645
greening your neighborhood

15:54.705 --> 15:59.165
or your local area, this, releases,

15:59.505 --> 16:03.525
yes, cost savings basically from, from heat stress,

16:03.995 --> 16:05.245
from heavy rainfall,

16:05.625 --> 16:08.845
but it also, prevents people, on their,

16:08.845 --> 16:10.925
on their energy bill and their air conditioning.

16:11.345 --> 16:14.205
Um, and it might also increase house value.

16:14.305 --> 16:16.565
So for example, we found that neighborhoods

16:16.565 --> 16:18.405
that really invest in greening

16:18.425 --> 16:21.765
and making, creating nature-based solutions

16:22.065 --> 16:25.485
to adaptation, their home values increased by

16:25.485 --> 16:26.485
around 12%.

16:27.025 --> 16:28.205
Now that is interesting

16:28.235 --> 16:31.365
because the government takes also a local tax from

16:31.365 --> 16:32.485
that value increase.

16:32.985 --> 16:35.405
And we think that also, we need

16:35.405 --> 16:38.245
to think about financial innovations also from a,

16:38.245 --> 16:41.205
from a financial sector perspective, in

16:41.465 --> 16:45.605
how we can pre-finance these investments,

16:45.615 --> 16:48.125
based on the returns that occur a little later.

16:48.785 --> 16:51.045
Um, and I don't have the answers yet,

16:51.045 --> 16:52.805
but I'm kind of really keen to get on with that.

Impact of Climate Change on Dutch Housing Market

00:00:00 - We took a quite of a holistic look at, how kind of a combination of, climate change. So the physical climate change, including global warming, but also natural disasters in combination with, all the efforts that policymakers, undertaken and homeowners therefore have to undertake to become, energy neutral. And, and we looked at kind of the, the, the total picture of what physical, climate change, efforts trying to adapt
00:00:37 - by investing in energy neutral homes, what all of that in its interaction could mean for the Dutch housing market. And, we realized that this was a really daunting task that we're gonna get ourselves into. But we were, the, the reason why we wanted to take that approach is because we thought, well, from a homeowner's perspective, it is very relevant, what all of these means in, yeah, in,
00:01:06 - of this happening at the same time, right? Because a lot of studies are looking at, an insulated, impact channel, such as physical risk and then a specific element on that, on, on, on a homeowner. But actually from a homeowner's perspective, you don't have really the choice to select one or, two of these channels of impact. It all happens at the same time. Climate change is, of course, a global phenomenon. we all know the IPCC makes scenarios of,
00:01:38 - we have a Dutch institution, meteorological institutions called KMI. They translate these scenarios to the Dutch local ground. So that gives us a sense. We took a scenario of high emissions called 8.5, and that gives you a sense of what could happen in the, in the, on the Dutch ground in terms of physical climate change. Now, that is, you have to think about, how that affects homeowners.
00:02:10 - There are more heat waves that generates heat stress, that affects, construction work for building properties. It also affects labor productivity of people, yeah. living in these economies. but you also have to think about drought, for example, which is, lowering groundwater levels and therefore creating damage to property
00:02:41 - that is, that sounds a bit, of course, the first thing everybody thinks about is floods. That's why I'm also mentioning this last, right? But, 60%, it is true, 60% of, Dutch GDP is earned far below sea level. So, the Netherlands is an extremely flood prone risk. but maybe to, to already, say something about, about results

Strategies for Dutch Homeowners Against Climate Risks

00:03:13 - least costly risk for the Netherlands and for Dutch homeowners, there are various things you can do. So, depending on what risk you're trying to fight, right? So if you think, for example, about, yeah, the obvious thing, flood protection, that is of course, something that you don't do inside the home. It's, it's, it's, you create regional and primary barriers that prevent, the water, sea water or river water from coming in.
00:03:43 - for example, think about greening the outside of your home. So what does that do if you invest, in greening the outside of your home and municipalities greening the cities? that basically, generates two implications for the other channels of impact. Because on the one hand, if you green your house, you basically, protect yourself for heavy rainfall, because soils absorb more heavy rainfall,
00:04:16 - getting damaged by, by, by water. but at the same time, it's also preventing against heat stress. So every tree that's being planted is an air conditioner less. so in that sense, it's also, again, affecting the mitigation channel because air conditioner use is, a big emitter of greenhouse gases. So, so adapt, adapt, adapting in terms of making your home greener, has both implications
00:04:47 - and the consequence of that to your property, but also lower, mitigation problems because you, use less air conditioning in the Netherlands. The, the economy says that, yeah, sea levels are rising and it could rise, up to around one and a half meter by 2100. that is in principle not a problem for the Dutch flood protection system. even if the sea levels would rise up
00:05:21 - that should not be a problem for the, flood protection barriers. that said, there is something to worry about, and that is that, you know, the Netherlands is used to planning at least 100 years ahead for its flood protection system. if we look beyond 2100, and that seems far away, but it's actually today in terms of starting to build protection past 2100.
00:05:52 - they actually do say that more extreme scenarios might happen. And, it is not the base case. But if they are to happen, because for example, of the, more rapid, eye sheet melting that we already see going on today, that might mean that, sea levels are gonna rise much higher. And that will mean that we have to start thinking today about different scenarios,

Future Planning for Climate Resilience in Housing

00:06:23 - and prevent log-ins today in order to be, to create optionality from, let's say, 2050 on where we have more certainty about these scenarios, to be prepared for 2100 and after. So that is a kind of a important conclusion of our research. and that always gets forgotten because it's such a long run thing. But, but the first conclusion that we take is that you have to start thinking now about more extreme
00:06:53 - If you think about the more shorter term until 2100, there is not that much of an issue. To be honest. The adaptation that is already planned, today for future flood protection is lowering the total flood risk in the Netherlands. ATS not creating more flood risk in the Netherlands. That is not to say that there are some locations where this doesn't hold. So for example, there are locations very close to rivers, where, houses are sometimes being built that is not,
00:07:30 - So we need to start thinking better about where to build and where to not build in the future. and, and that creates choices about, yeah, where we, where we want to be living and building in a country which is already super scarce of, building locations and land use locations in general, climate mitigation, if from the perspective of the housing market is basically all about all the
00:08:01 - neutral, right? So that is, insulation, solar panel installation, heat pumps, that all amounts to around 35,000, euros from a low energy label home today to an energy neutral home in the future. So that's, that's, that's, that's a big sum of money. And when you compare this to the, to the physical risks and the adaptation cost, this is actually the most expensive thing, in, in comparison to all of them.
00:08:34 - and so that is a big investment. There are a lot of hurdles in, in getting buildings to energy neutrality that has to do with, grid capacity that is, not available. it has to do with, labor shortages in construction. so, so there are a lot of hurdles, which I think a lot of countries are facing today, especially, countries that are, that, that are basically, operating, above their,
00:09:02 - so, so that is an issue, but it doesn't have to be a long-term issue. the, the, the main thing is that, homeowners need, liquidity to make this investment. So that's, that's clearly the main hurdle here. What are the, the macroeconomic costs associated for, getting the Dutch residential real estate, climate resilient and, energy neutral? And, and then we, we have made an overview

Energy Neutrality and Housing Market Impact

00:09:32 - And, and indeed it is the, the energy neutrality investments that is the, the biggest chunk. And, then you get the foundation risk, which is about, 0.2% of, Dutch GDP on an annual basis. then you get, flood protection and, and the other, elements. So, but the big macro story is that this is actually, not gonna severely disrupt the Dutch housing market at all.
00:10:06 - homeowners, have a mortgage resting on, on that home that is around, 60, 65% of the total property value. And so that means the additional financing room to deal with these costs is there. So that's basically the reassuring first conclusion. but there is a big, but that these costs are very, unequally distributed.
00:10:36 - which we included in the study, but we did this in my bank separately, is we actually took all these different, risk types and we, we made them on the level of the neighborhood, and we basically started stacking them. So we wanted to know what climate risks and transition risks are really, potentially too much for homeowners in which locations. And, and there we find
00:11:08 - And of these 3000 neighborhoods, there are around 90 neighborhoods. So 0 9, 9 0, where, at least two problems. So the transition risk and mostly the foundation risks they play at the same time, while homeowners are financially less resilient, and that means that the property might not, be valuable enough to be worth the whole repair cost,
00:11:38 - of the homeowner is unsufficient to finance that repair. So the first thing that needs to happen, and it's a bit of a painful thing that needs to happen, would be really thing we need to get there, is that these, so, so transparency of these risks on a very granular level is going to make sure that these risks are going to get priced into the market. So what that means is basically distribution of these costs between the current homeowners and future homeowners.
00:12:11 - they are better able, and it's more fair to, to let them deal, with the costs that are known today. Because we know in the future we will know more about, costs that are probably gonna be, more likely to be higher than that, they're gonna be lower. And so those, that additional information in the future is gonna burden future homeowners anyway. So our proposal is let us make a clear,

House Prices, Risks, and Climate Inequality

00:12:43 - of these risks into the market so that, house prices can correct. But what that means is that homeowners, who are, who are buying a home in a climate vulnerable location, they might observe that those prices are suddenly lower than they were before, before those risks were being priced in. And what that means is that, vulnerable homeowners with
00:13:16 - because they basically observe that that home is now within their range of affordability that wasn't before. And that is something that, is a second order effect that, that creates inequality. Because what, what you end up with is that, vulnerable people end up in vulnerable places, and that, of course creates inequalities into the future. And so what we propose as a second order, instrument is that the government should think about climate resilient
00:13:50 - a reserved space for financially vulnerable homeowners to be able to move to. Because what you will get is that, financial, sorry, climate, resilient locations will become more scars. And so what, what, will happen is that they will become more expensive and then they will become out of range for these, vulnerable homeowners. So unless, so if we wanna, so the first thing is to,
00:14:19 - And the second thing is to make sure that the movements that will happen, as a result of this pricing effect, do not lead to additional inequality. There's a lot of future research that, and research ideas that's coming out of this, because this was very broad and holistic. And I actually, do wanna say, and I, I wanted to say that in the beginning, but, this is an initiative of the, chief economist and the, and the housing market economist of free banks.
00:14:53 - and, and so we, we took this initiative and, and we actually think that there's so much more to be known here. So, one of the, one of the things that, that we think, needs to, happen first is we need to get to this more granular information of property level climate risks. Because of course, the danger is that if you stay on a neighborhood level, then still, you introduce risk premia for properties
00:15:23 - and you might underestimate, risks, in, in, in properties that on a neighborhood level seem fine, but individually are not fine. So that is something that needs to be studied. but that of, of course depends on data availability. the other thing that I find personally very interesting is the interaction effects. So what, what does, so the example that we started with, so if you, for example, invest in,

Greening Neighborhoods: Boosting Home Values

00:15:54 - or your local area, this, releases, yes, cost savings basically from, from heat stress, from heavy rainfall, but it also, prevents people, on their, on their energy bill and their air conditioning. and it might also increase house value. So for example, we found that neighborhoods that really invest in greening and making, creating nature-based solutions to adaptation, their home values increased by
00:16:51 - Now that is interesting because the government takes also a local tax from that value increase. And we think that also, we need to think about financial innovations also from a, from a financial sector perspective, in how we can pre-finance these investments, based on the returns that occur a little later. and I don't have the answers yet, but I'm kind of really keen to get on with that.

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