I’ve been trying to follow a nagging thought through to its conclusion. We know to expect that flooding risk will extend to an ever increasing proportion of the UK housing stock. But in the context of financialisation, mortgages underpin bank lending, and by extension the wider financial system. And a majority of households depend on their house as a savings vehicle. So what happens when physical climate impacts destroy the real assets that households and the financial system are relying upon?
This is part 7. Housing the next crisis.
When we think about the problems of real estate and asset inflation, we should understand the subtext – that the mistakes we are making in the financial system are premised on instrumentalising people’s homes. It is the housing sector that is driving, sustaining and reproducing finance-led growth.
Low interest rates have created a situation in which there is no offer of meaningful low-risk, long-term cash savings – only high-risk portfolio investments or mortgage loans. This has transformed housing into a highly leveraged investment savings vehicle, less volatile than portfolio investment and capable of making inflation-proof gains over the long term.
There are winners and losers to this situation. Wealth gains from housing are shaped by age and place and these wealth gains can therefore be understood as a form of intergenerational and regional inequality. Intergenerational inequality is especially significant given that we can’t generalise the wealth gains from housing over the past thirty years to the next thirty years because of the absolute limits of finance-led growth. Generalising wealth gains from housing ignores the present-day limits of household incomes or the existing historically un-precedented mortgage debt overhang.
In the UK, residential mortgages account for about two-thirds of total bank lending (p190, Other People’s Money). Residential property mortgages are a key source of new money creation in the UK economy, as banks create money when new debt deposit accounts are made and when issuing mortgages. Creating debt deposits secured against residential property is almost risk-free for lenders because the UK has ‘full-recourse’ mortgages, allowing the lender to not only keep all collateral but also pursue the full value of the debt from the borrower regardless of the value of the asset.
This is a stark difference compared to the American ‘non-recourse’ mortagage that entitles the lender only to repossess the property and sell it to recoup costs. Put simply, if the UK housing market takes a downturn all the costs are disproportionately incurred by the borrower, posing a major systemic risk to the rest of the economy.
Climate risk meets finance-led growth
The UK’s financial system is uniquely vulnerable to housing market disruption due to its structure of full-recourse mortgages and the central role of housing as both a savings vehicle and a source of bank lending. The Environment Agency’s projection that 25% of UK homes will face flood risks by 2050 presents an unprecedented threat to this system. Unlike gradual market corrections, climate-related devaluation could occur suddenly and irreversibly as insurance becomes unavailable or prohibitively expensive for at-risk properties, triggering a cascade of consequences.
When homes become uninsurable due to flood risk, they effectively become unmortgageable. This could lead to a rapid devaluation of affected properties, but unlike in a normal market downturn, these devaluations would represent a permanent, structural change in the property’s worth. Under the UK’s full-recourse mortgage system, homeowners would remain fully liable for their original mortgage amounts, even as their properties lose substantial value. This creates a particularly cruel scenario: homeowners would face triple jeopardy – the physical damage to their homes, the loss of their primary asset’s value, and the ongoing obligation to repay mortgages far exceeding their properties’ worth.
The systemic implications are severe. Banks’ mortgage portfolios could face widespread impairment, not just from defaults but from the fundamental reduction in the value of their collateral. This could trigger a credit crunch as banks become reluctant to lend against properties in potentially vulnerable areas – which, given the interconnected nature of housing markets, could depress prices even in areas not directly at risk of flooding. Meanwhile, many households would find themselves trapped – unable to sell, unable to remortgage, but legally bound to maintain mortgage payments on effectively devalued assets. This could force significant reductions in consumer spending as households struggle with debt service, potentially triggering a broader economic contraction.
Those most affected would likely be middle- and working-class homeowners who have been encouraged by policy to view property as their primary savings vehicle and route to financial security. Unlike previous housing crises, this wouldn’t represent a cyclical downturn from which values might eventually recover – climate-related devaluation would represent a permanent erosion of household wealth, potentially wiping out life savings and retirement plans for a significant portion of the population.
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