As natural disasters like wildfires and floods become more frequent and severe, the impacts on home financing are growing, leading to increased risks for lenders and higher costs for homeowners.
In 2023, insured damage from natural catastrophes and severe weather events in Canada reached over $3.1 billion, marking the fourth-worst year on record for insured losses, according to Catastrophe Indices and Quantification Inc.
Between 2009 and 2021, claims surged to an average of $1.96 billion per year, with more than half of this increase attributable to flooding. By comparison, between 1983 and 2008, insurance claims for climate-related events amounted to about $250 to $450 million per year.
Rise in extreme weather events over the past year
The past year saw a range of extreme weather events across Canada, highlighting the increasing severity and frequency of natural disasters.
Some of the noteworthy events last year included the Atlantic Canada cold snap, the spring ice storm in Ontario and Quebec, the Tantallon wildfire in Nova Scotia, extensive flooding in Nova Scotia, severe summer storms across the Prairies, wildfires in the Okanagan and Shuswap areas of British Columbia, and the Behchokǫ̀-Yellowknife and Hay River wildfires in the Northwest Territories.
Courtesy: Insurance Bureau of Canada
More recently—mere days ago—Toronto was inundated with nearly 100 mm of rain, leading to widespread flooding of roads and basements, which the Insurance Bureau of Canada estimates could top $1 billion in residential and commercial damage.
A week earlier, the remnants of Hurricane Beryl drenched southern Quebec, resulting in record-breaking rainfall in Montreal and similar widespread flooding.
This came less than a month after the Quebec government released estimates that nearly 77,000 homes, or 2% of the province’s population, could find themselves in a flood zone based on new flood maps that are set to be released. That would be up from the 22,000 homes currently in flood zones today.
“The increasing frequency and severity of climate-related disasters should be of concern to all Canadians, even if they have yet to be directly affected,” said Craig Stewart, Vice-President, Climate Change and Federal Issues, Insurance Bureau of Canada (IBC).
“The homes and financial health of over 1.5 million Canadians are at high and growing risk,” he added.
A growing concern for mortgage insurers and lenders
The increasing frequency and severity of extreme weather events are prompting urgent action in the mortgage industry.
The latest annual report from the Canada Mortgage and Housing Corporation (CMHC) highlights wildfires and floods as top priorities for assessing business strategies, operations and financial plans. Consequently, mortgage lenders and insurance companies throughout Canada are adapting to this new climate reality.
Climate risks affect multiple areas, including credit, market and operational risks. In 2023, CMHC conducted qualitative assessments of climate-related risks and incorporated the findings into their quarterly risk management reports.
CMHC’s key climate-related concerns include:
- Increased borrower defaults and declining property values due to extreme weather events.
- Rising demand for affordable housing driven by migration from hazard-prone areas.
- Strained supply chains and increased costs from rebuilding damaged infrastructure.
Regarding its own balance sheet, CMHC acknowledged its significant exposure to flood risks, with a notable percentage of insured loans and balances located in high-risk areas for both riverine and coastal flooding.
Focusing on properties with a flooding probability of at least 1 in 100 years, CMHC estimates its exposures are:
- Homeowner MLI (mortgage loan insurance) business: 4.2% of insured loans (34,717 out of 830,831) and 3.9% of insured in-force balances ($6.7 billion out of $172 billion).
- Multi-unit MLI business: 3.1% of insured loans (834 out of 26,979), accounting for 3.3% of the total insured balance ($4.25 billion out of $129.5 billion).
- Mortgage funding business: 4.3% of all NHA MBS loans (93,182 out of 2,147,646) and 4.2% of the overall balance of securitized loans ($19 billion out of $453 billion).
Impact of extreme weather on home valuations
The impact of extreme weather events on home valuation is becoming increasingly evident, with severe flooding, in particular, having a profound effect on the residential housing market.
According to a report released by the University of Waterloo’s Intact Centre on Climate Adaptation, flooding can lead to significant changes in the real estate market in the six months after flooding events, compared to the six months before:
- 8.2% reduction in the average sold price of houses
- 19.8% increase in days on the market
- 44.3% reduction in houses listed for sale
To put this into context, for a house priced at the Canadian average of $713,500 (as of December 2021), a neighbourhood subject to catastrophic flooding could see the house sell for $654,993, reflecting a “flood discount” of $58,507.
In most cases, the impact on the real estate market is temporary.
Doug Farmer, assistant vice president of First National Financial, told CMT that if the value of a home is affected by an extreme weather event, its value will be restored again over time when necessary repairs are made and the marketability of the area evolves in a more positive trend.
In general, “over time, the market values do return,” he said.
But that’s not necessarily the case for select areas that can experience near-annual severe weather events, notes the Intact Centre report. A case study for Fredericton, New Brunswick, found that for such communities, the impacts of regular flooding can have long-lasting impacts on the market.
“For communities within cities that flood on a near annual basis for at least a decade (vs. one or two catastrophic floods per decade), the impact of flooding can be priced into the real estate market permanently,” the report notes.
The good news, in terms of residential mortgages, is that the net impacts of catastrophic flooding on mortgage arrears and deferrals showed no consistent or material impact across two Canadian cities, according to the report.
The rate of arrears and deferrals in flooded versus non-flooded communities largely fell within market norms, indicating that factors other than flooding may be more consequential to mortgage delinquencies.
The total number of arrears and deferrals in flood-impacted and control regions ranged from 0.32 – 7.07 per 1,000 homes over a six-month period, which translates to a worse-case scenario of 1.18 arrears and deferrals per 1,000 homes per month, the report found.
“The consequences of flooding appear to be relatively immaterial regarding mortgage arrears, particularly considering that impacts would generally last only a few months post-flood,” the report noted.
Lending in higher-risk areas
While the lasting impact on home valuations from extreme weather events can be temporary, lender risk appetite can be impacted indefinitely.
During the 2013 Alberta floods, for example, Farmer says most damaged houses were then remediated or rebuilt by the insurance companies or other financial means. He said communities have done their best to prevent damage from flooding going forward, but some lenders are still reluctant to work in these regions.
“There’s certain lenders that won’t go there,” he said. “It’s their duty to protect investors/depositors’ money and they’ve set their risk assessment parameters accordingly.”
However, in general, there are still numerous mortgage lending options available in these regions, so long as the buyer is able to get appropriate insurance.
“All of us lenders have our red zones—areas that we would scrutinize more closely as far as risk assessment goes,” said Hali Noble, Senior Vice-President of Residential Mortgage Investments and Broker Relations at Fisgard Asset Management. “Certainly, there are areas that have had a lot of issues in the last few years for forest fires, but as long as we’re covered by appropriate insurance and that’s part of our underwriting package and one of our conditions to fund, we’re okay.”
Noble emphasizes that no lender would finance a mortgage without proper insurance coverage.
“Those insurance policies are extremely important and what’s covered within those policies and how those policies are going to protect the lender, and ultimately, our mortgage investment,” she said.
Depending on the region, however, some lenders are reconsidering their lending practices in areas vulnerable to severe weather events.
In February, Desjardins Group announced changes to its underwriting guidelines and will no longer offer mortgages for properties that fall within certain flood zones.
Specifically, parts of Île-Bizard and Île-Mercier in Quebec, which saw severe flooding in 2017 and 2019, will be impacted by the credit union’s decision.
“The impacts of climate change, including water damage, are growing in importance and causing substantial damage,” Desjardins said in a statement.
Assistance for homeowners impacted by severe weather
Homeowners affected by flooding and wildfires typically rely on insurance companies to cover the costs of repairing or rebuilding their homes. However, additional expenses during this period can impact their ability to make timely mortgage payments.
Farmer notes that many companies have implemented structures to support homeowners through these difficult times. These measures may include delaying mortgage payments and adding them back to the principal or extending the amortization period, depending on the individual’s situation and financial needs.
“Nobody wants to see someone lose their home,” Farmer said. “So there’s many vehicles in place to help people through these difficult times.”
The Financial Consumer Agency of Canada (FCAC) has established guidelines for banks to provide tailored support to individuals struggling with mortgage payments due to exceptional circumstances, such as natural disasters. These guidelines include:
- Mortgage payment deferral: Homeowners can delay mortgage payments for a specific period, usually up to four months.
- Extended amortization period: Extending the amortization period to lower monthly payments, although this may increase the total interest paid over the life of the mortgage.
- Special payment arrangements: Temporary reduction in mortgage payments or capitalization of missed payments and related costs.
Additionally, federally regulated financial institutions are expected to proactively offer relief measures, such as waiving late fees and not reporting missed payments to credit bureaus if relief measures are in place.
These measures help to alleviate the financial burden on homeowners, ensuring they can maintain their homes during recovery periods.
Mitigating risk caused by extreme climate events
Mitigating the impacts of extreme climate events, particularly flooding, on residential properties is a growing concern in Canada. Several strategies and resources are available to help homeowners and communities reduce these risks:
Home flood protection guidance
Banks, credit unions, real estate brokers, mortgage providers, and Property & Casualty insurers are increasingly distributing the “Three Steps to Cost-Effective Home Flood Protection” infographic.
This resource provides practical steps for homeowners to reduce the risk of basement flooding, most of which can be implemented with minimal cost and no special expertise.
Climate Adaptation Home Rating Program (CAHRP)
Launched by the federal government of Canada in 2021, CAHRP helps homeowners navigate the flood retrofit process. It complements EnerGuide home energy audits and expands the eligibility requirements of CMHC’s deep home retrofit program and Canada Greener Home Grants to include more climate resilience and flood risk mitigation measures.
Flood risk maps
Federal, provincial, territorial and municipal governments are updating flood risk maps to assist city planners, developers, engineers and municipal risk officers in identifying and mitigating high-risk areas. These maps also help homeowners make informed decisions to limit flood risk.
Residential flood risk scores
A proposed system would establish a flood risk score for residential properties based on address or postal code, similar to the system in the United States. This score would help homeowners understand and mitigate their flood risk.
Community flood risk mitigation
Communities can use guidelines from the Standards Council of Canada and the National Research Council to identify high-risk areas and deploy mitigation actions. Some areas may require more substantial and cost-effective remediation efforts.
“The ‘bad news’ regarding the impact of flooding on residential housing is that
climate change and extreme weather-related flood risk, at times combined with poor
land-use planning, will get more challenging across many regions of Canada , and if left unchecked, will increasingly distress the residential housing market,” warns the Intact Centre.
“The ‘good news’ is that Canada has developed, or is in the process of developing, a
wealth of guidance to help homeowners and communities to mitigate flood risk,” it adds.
climate change CMHC Doug Farmer Editor's pick extreme weather Financial Consumer Agency of Canada flooding Hali Noble Intact Centre on Climate Adaptation wildfires
Last modified: October 23, 2024
