Extreme weather risks for house foundations should be reflected in home prices: AFM

The consequences of climate change, including extreme heat and heavy rainfall, should be factored into home valuations, according to a report published on Tuesday by the Dutch Authority on Financial Markets (AFM). The regulator emphasized the importance of raising awareness about the damage to foundations caused by both flooding and drought.

One in eight homeowners will probably have to deal with foundation damage, while 85 percent of homeowners with foundation risks are not aware of this, the regulator remarked. The costs for the repair of foundations are significant, with amounts averaging 54,000 euros and even up to 100,000 euros.

Another issue is flood damage from rivers is not insurable. "Ten years ago, we were worried about homes that were figuratively underwater - meaning they were worth less than the mortgage taken out on them. Now we're worried about homes that could literally end up underwater," explained Laura van Geest, Chair of the Executive Board at AFM.

In addition to the increased risk of flooding from heavy rainfall and rising sea levels, prolonged and more frequent periods of drought also cause significant damage. Drought can compromise the stability and support of building foundations due to lower groundwater levels, which can eventually lead to the sinking and even collapse of homes. Moreover, the higher frequency of extreme heat increases the risk of wildfires and heat stress.

The regulator emphasized that awareness of these risks needs to be increased. If these risks are not known to new homeowners, buyers might retrospectively feel they have bought a "pig in a poke," as AFM put it. Unanticipated damage from floods or foundation damage can lead to a decrease in property value, potentially falling below the mortgage amount. It is also questionable to what extent homeowners can financially cover this damage.

According to the AFM, the reason why potential flood or foundation damage is not currently reflected in property values is threefold. Firstly, consumers are not sufficiently aware of the risks; secondly, sellers are not required to disclose this information. In addition, the data on these risks are "not always considered reliable," the AFM stated.

The AFM notably proposed the introduction of a “climate label,” similar to the energy label, to inform buyers and buyers’ agents about potential risks due to climate change before the sale of a property, which would then be reflected in the house price.

The regulator acknowledged that pricing in climate risks is a complex issue involving many different stakeholders and interests. However, several parties have already taken initiatives to, for example, raise awareness of the risks, which is good news according to Van Geest. "The government can take control here. The sooner, the better," she said.