Is climate change putting the real estate component of financial plans at risk?

As climate change contributes to the frequency and intensity of natural disasters, real estate – the largest component of many Canadians’ nest eggs – is under threat.

Homes and cottages are vulnerable to severe storms, wildfires and flooding, and property insurance may not cover the damage. Do financial plans need to adapt to include projected costs to repair or rebuild property and pay rising insurance premiums?

A recent analysis by My Choice Financial Inc. found that average annual insurable damage in Canada caused by natural disasters was up 379 per cent in the past 10 years compared with the previous 30 years. That’s resulted in an average increase in annual home insurance premiums of 76 per cent, or $409, over the past decade (adjusted for inflation).

Even provinces that saw a decline in insurable damage experienced rising premiums. Meanwhile, some insurers are opting not to cover certain property damage risks.

“Insurance companies have been pulling out from Florida just because it’s too expensive to insure houses there, with hurricanes happening almost every year,” says Vitalii Starov, vice-president of product growth at My Choice Financial in Toronto.

“From the Canadian perspective, we’re in a similar situation in Alberta with the wildfires; there were a few companies that started to pull out their coverage from Alberta this year.”

Erik Wachman, financial planning advisor with WWH Financial Group at Assante Financial Management Ltd. in Mississauga, has a client who owns two investment properties in Florida that experienced six-figure damage in this year’s hurricanes. Mr. Wachman confirms it isn’t always possible to get appropriate levels of insurance.

“That’s one example where you might have a significant asset, it’s growing, but you don’t know until these major events happen how much you are in for,” he says, adding there’s also currency risk if a client’s money is in Canadian dollars and has to pay for repairs in U.S. dollars.

“If you own properties, you do have to make sure you have some money set aside or that you have some insurance if you can get it because the cost can be significant if there are damages,” he says.

Mr. Wachman’s colleague, senior financial planning advisor Per Homer, lives in Oakville, Ont., which experienced heavy rains in August that caused many basements to flood. Reclaiming a basement after flooding can cost upwards of $50,000, he says, and home insurance may not cover flooding or may have a cap much lower than that amount.

“People are starting to think they need to have some reserves or an unused line of credit to cover these kinds of emergencies,” Mr. Homer says. “That’s something I often talk to clients about when they’re renewing their mortgages.”

His business doesn’t do property insurance, but he advises clients to ensure their mortgage includes either an advanceable portion or that they’re carrying some form of larger, unused line of credit for emergencies.

From Mr. Wachman’s and Mr. Homer’s perspective, costs associated with climate change are harder to quantify but fall into the same category as costs associated with other expensive risks – such as unexpectedly having to buy a new car, furnace or roof.

“Risks can come from many different angles, and we just want to be prepared,” Mr. Wachman says.

Mr. Homer adds that his financial plans never assume someone will sell their home to generate income in retirement. Rather, that asset is a buffer that may be used, for example, if a client needs to move into a new home or a long-term care facility as they age. In addition, although he’s bullish on the prospects for Canadian real estate, he always assumes a modest growth rate for home values.

Andrew Feindel, senior portfolio manager and wealth advisor with Richie Feindel Wealth Management at Richardson Wealth Ltd. in Toronto, has clients who own cottages that border Lake Huron, where erosion is shrinking beaches and threatening cliffside homes.

“We’re starting to bring this [issue] up in conversations because it’s our job as financial planners to show people the facts,” he says. “We can be proactive. We can model this in the plan.”

Historically, the standard advice for emergency funds was to build savings to cover three to six months of expenses, or 10 per cent to 30 per cent of annual income. Mr. Feindel says it may be necessary to revisit those numbers to account for potential damage to homes and cottages.

He also thinks growth rate assumptions for real estate, which often track inflation, may need to be adjusted downward, particularly if real estate is in a location that’s vulnerable to climate change-related risks.

“I would push back on the premise that buying a cottage is a great investment right now, [especially] when you factor in the increased capital gains inclusion rate [and] the fact you’re buying it at inflated prices,” he says. Climate change “just adds that extra element of risk.”