Flood and Property Price
Floods are an annual phenomenon in Malaysia due to the northeast monsoon that brings heavy rain from November to March, which brings significant loss of homes, income and lives. Based on a study by DOSM, the overall losses in Malaysia due to floods amounted to USD 1.342 billion, of which living quarters amounted to USD 352 million. More than 5,500 and nearly 6,500 flood evacuees fled from their homes in Johor and Sabah amid the monsoon flood in January 2023 according to a report by CNA.
Climate change will likely intensify heavy precipitation events as warmer temperatures increase evaporation and put more moisture into the atmosphere. According to a 2021 study published in Nature, researchers found climate change is likely to exacerbate the frequency and intensity of extreme flood events due to river floods. Researchers also expect the timing of flash floods will get shorter while the magnitude gets higher.
The threat of climate change is genuine in Malaysia. In the Klang Valley, the number of days when the temperature crosses 32 degrees Celsius is rising. In 1971, only 176 days were hotter than 32 degrees Celsius. In 2020, Malaysiakini reported that 80 percent of the year surpassed the threshold. According to the National Water Research Institute of Malaysia (NAHRIM), the one-hour and three-hour short-duration rainfall intensity in 2000-2007 increased by 17% and 29%, respectively, compared to the 1970s.
The floods have placed a heavy burden on households. On the one hand, they have to make good of the damage caused by the floods and invest in mitigating measures. On the other hand, the households lost income as they could not go to work, or their business suffered. Intuitively, buyers would avoid buying homes in flood-prone areas. The results, however, seemed mixed. There search by ABN-AMRO shows that the flood risk is not capitalised in the residential market. Another academic study found that flood hazards hurt the price of residential single-family houses in the Fargo-Moorhead Metropolitan Statistical Area between 2000 and 2013. However, the price effect of the significant flood declined after a year.
Researchers from NBER found that the impact depends partly on how buyers and sellers perceive flood risk. Studying the effect of variations of beliefs about flood risk on coastal housing, the researchers found that a few people with optimistic assumptions about future risks can lead to inflated coastal housing and more significant price declines as beliefs converge.
USD 1 = RM 0.22 as of 20th June, 2023.
Flood Scores and the Malaysia Property Market
We examined whether the residential property prices of homes in Wilayah Persekutuan Kuala Lumpur capitalised on the effect of flood risk, using the transactions from 2018 to early 2021. To determine the flood risk, we utilise the flood scores generated by Intensel Climate Risk Solutions. Intensel is Asia’s leading ClimaTech Company that offers in-depth, granular analysis of climate risk to the asset level using big data and enhanced artificial intelligence.
Intensel’s Flood Risk Score is calculated from the number of flood triggering meters like high return period flood layer, height abovenearest drainage (HAND), slope, elevation and land use land cover ratio. The risk of flood is greater if the flood risk scores are higher,and the table below shows the extent of risk given the range of scores.
The Impact of Prices on Condominiums and Terraces
Based on our regression model, we found that the flood risk has a negative impact on home prices in the Capital City of Malaysia. An increase of the score by one is associated with a 0.37% decrease in price. The price differential could be about 8% if one property has a score of 40 (Low Risk) and its comparable has a score of 60 (Medium-high Risk), assuming all factors remain constant.
Flood Risk and Price Trends
Buyers purchasing homes with higher flood risk are likely to see fewer upsides than those with low flood risks. When we compare the median prices of residential properties with low risk (less than 40) against those with medium-high risk and above (more than 40), we found the median price of properties with higher risk was lower from 2018 to 2020 (Figures 1.2 and 1.3). The prices of high-risk residential properties do exceed the prices of those with lower risk from time to time, but these occurrences seem to be outliers. Another observation was that the properties of medium-high risk and above tend to peak during the non-monsoon months. In other words, buyers who purchase during non-monsoon months tend to overpay, especially if there are groups that believe sufficient mitigation strategies have been undertaken to lower the risk.
What is the Implication of Climate Change?
Climate Change is likely to increase the flood risk of properties over time, and those with low-risk scores may likely move up to the medium-high risk band. The increase in the probability of flood due to climate change will represent a significant loss in price, excluding the costs of making good the property and expenses of loss in income due to inaccessibility. The fall in the value of the properties will impact the homeowners’ investment return and affect the financial institutions that lent the owners money.
Insurance Payout: Will It Be Enough?
Separately, many Malaysian homes were not protected from flood and fire damage, according to a survey conducted by Zurich Malaysia in 2021. According to the study, two-thirds of homeowners have no coverage against flood damage and a third of the insured homeowners do not have home content protection. The recent floods probably prompted a shift in mindset last year, based on PropertyGuru Consumer Sentiment Study H2 2022. Based on the survey, 2 in 3 respondents are willing to pay a higher insurance premium to protect their homes from climate change effects.
However, the home insurance only provides coverage for loss or damage to the building and contents solely used for residential purposes only. Depending on the extent of coverage, financially constrained buyers are unlikely to pay a lot for comprehensive coverage.
With climate change, the homeowner or bank will bear the loss in the value of the home and operating income due to persistent floods. Insurers may also carry the risks as the frequency and intensity of flash floods increase.
A Holistic Solution: Long and Immediate Term
The Malaysia Government is actively working out long-term measures to resolve the flood problem, which will involve huge costs, including the USD 3.3 billion flood mitigation project implemented by the previous Government.
Besides improving the infrastructure and coordination of efforts to assist promptly in the event of floods, it is also pertinent to examine how the people could be relocated away from the flood-prone areas.
Data from the World Bank Disaster Poverty Household Survey (DPHS) showed that poorer people are attracted to flood-prone areas by cheap housing and accessibility to jobs. The data shows that households experiencing higher flood risk pay 14 to 56 per cent lower rents in Accra (Ghana) and Addis Ababa (Ethiopia).
In order to encourage people to move to areas with low flood risks, the Government could consider creating new towns with the same level of accessibility and attracting firms that offer similar employment opportunities. The first stage will involve mapping the mobility patterns of the people in flood-prone areas and deriving their critical paths to work and play so that the planner can recreate a similar town with the transport infrastructure needed.
In the immediate term, the owners should remain prudent and take home insurance or takaful to mitigate potential losses. Additionally, they should do diligence checks on whether the area is flood-prone.
This whitepaper is an excerpt from the recently released ESG Report. Read the full report here