Experts predict sea levels to rise a foot in the next 30 years, creating threatening conditions for residents and property.
"It's going to be in unexpected areas that have not flooded but are now starting to flood."-Dr. William Sweet, NOAA Oceanograper
Sea level rise and its consequences (flooding) are already having a measurable negative impact on coastal property prices in Florida.
Three of every four people in Florida live in the state's coastal areas. About 5.9 million live in locations less than three meters (9.84 feet) above sea level. However, even though sea levels are rising gradually, gaining about an inch every three years in the most vulnerable areas, their impact on coastal property prices in Florida has been observable since 2012.
The impact of sea level rise on sales data in Florida since 2012
A report (Published in 2020) compared the Florida real estate sales data over the last decade and revealed a significantly measurable disconnect between two property classes in the state. These classes are properties vulnerable to Sea Level Rise (SLR) and properties less exposed to SLR. Susceptible, more exposed properties experienced a 16-20% decline in sales numbers compared to less exposed to this natural phenomenon.
Interestingly, this didn't impact the prices of these properties until 2018 to 2020, when they experienced a slump of about 5-10%. This trend is similar to most housing bubbles, where a drop in volume precedes a reduction in property prices. However, in this case, the trigger behind the decline is an environmental factor instead of economic or inventory factors (organic real estate elements).
As visible in the chart below, the HPI, or Housing Price Index, moved almost parallel for both property types, even when there was an actual price difference. However, the split started around 2018, and the difference has expanded.
The SLR numbers for the study come from census data, and so far, it doesn't consider the acceleration in the sea level rises in different areas of the coastal line. A comprehensive study comparing exposure levels to housing market trends may reveal how far the fear of rising sea levels has penetrated the buyer pool.
How sea level rise will impact coastal property prices in Florida
Properties in areas more vulnerable to sea level rise are already experiencing a price drop compared to counties/regions less exposed to this risk. Flooding exacerbates this already dire situation. A correlation exists between areas vulnerable to sea level rise (due to their lower elevation) and flood risk. Coastal flooding is directly proportional to sea level rise, and its impact on coastal property prices is far more pronounced.
A McKinsey study suggested that flooding can devalue the most exposed segment of real estate by about $30 billion to $80 billion, significantly impacting the local government's real estate taxes. This projected devaluation, a direct consequence of flooding, doesn't consider the falling sales number and reflects a pricing slump.
Another McKinsey study endorses this claim and reveals tangible pricing trends that are already observable. It has shown that properties exposed to flooding have already experienced a 3% price decline, and properties areas that have experienced disruptive flooding, i.e., enough to disrupt the natural flow of life for days, have lost about 11% of their value.
Southeast Florida is especially vulnerable to sea-level rise, and multiple market segments in this region are experiencing a steady price decline from last year's numbers. Considering the flooding risk one of the most attractive markets in Southeast Florida (Miami-Dade) carries, the price drop may become significantly worse over the year.
Flooding Risk in Specific Markets
According to a study, currently, only 5% of the properties in Miami-Dade oceanfront communities face a moderate level of flooding damage risk. But in just one decade (2030), 86% will face that risk. The situation looks bleaker if we look farther ahead. By 2050, annual flooding damage in Miami-Dade County will almost double, and the number of properties at risk of chronic flooding will rise by 61% compared to 2020.
Miami Dade is one of the most lucrative markets in Florida, ironically making the situation much worse for several reasons. The price drop and a decline in the number of sales, while accelerating, are still at reasonable levels, which shows that there is not yet "panic" in the market, but it may only be a matter of time. If the first casualty of sea level rise on coastal property prices in Florida is the Miami-Dade real estate market, it may also set an alarming trend for smaller, less well-known markets.
The impact of rising insurance premiums on property prices
Empirical evidence suggests that rapidly rising insurance costs impact the prices/value of the properties in the flood plains, making Florida especially vulnerable as about 16% of the current housing stock in the state is on floodplains, which is significantly higher than the national average of about 3.6%. Changes in insurance policy definitions for properties in the floodlands and premium calculations based on a broader range of flood-risk variables may exacerbate the situation.
The problem of insurance premiums impacting property prices looks much worse if you look at the state from an investment perspective. Investors own a significant segment of Florida real estate, with a pronounced presence in some of the most lucrative markets. Foreign investors bought about $6.8 billion of real estate in South Florida between August 2021 and July 2022. Most investors in Florida aim to capitalize on the thriving rental market (and lack of rent control). However, sea level rise and the consequential higher flooding risk may impact this in two ways.
The first is population influx. Florida is still one of the states that experience the most influx of people from other states. If the trend shifts or shifts from coastal areas (the most attractive parts of the state) to inward regions, the rental market may experience shrinking and potentially discourage "big money" away from the state, and a significant drop in foreign or local real estate investments in coastal properties in Florida would substantially impact the prices. That's because foreign investment is one of the factors propping up real estate prices.
The second reason involves the insurance premiums themselves. If the landlords start passing on the cost of rising premiums to the tenants, it may distort the rental market. If they don't, it will cut their profits and may trigger a steady decrease in investor interest in the region.
There was still a significant lack of awareness or unwillingness to accept the impact of sea level rise on property values until a few years ago. However, frequent flooding and more understanding about the issues are now impacting the purchase patterns of real estate buyers/investors in the Florida real estate market.
The detrimental impact of sea level rise on coastal property prices in Florida is already visible and will become more prominent in the coming years. Unfortunately, even if the US government or governments worldwide take bold, drastic measures to reduce emissions and preserve the environment, it may not slow down or positively impact sea level rise for decades, leading to a one-way negative trend rapidly moving towards a snowball effect.
This article is for informational purposes only. It should not be considered financial, real estate, or legal advice. The market fluctuates; therefore, not all information will remain the same. Consult a financial or real estate attorney before making significant real estate decisions.