Real estate market and climate change

In its latest Financial Stability Report, the Bank of Spain analyzes the impact of the “Mar Menor” ecological degradation process on the real estate market, in an exercise similar to estimating the costs that the physical risks associated with climate change would have. This type of exercise helps to visualize the possible impacts of climate change. The Bank of Spain points out that while the cost of acting is known with some precision (the necessary investments), the benefits (costs avoided because the risk do not materialize) are much more uncertain. That makes it difficult to make decisions and carry out actions in the present that could mitigate potential risks to financial stability.

• The exercise compares the evolution of price per square meter of housing sold in the “Mar Menor” area, with similar and nearby homes (south of Alicante) that are not affected by the specific ecological phenomenon of the “Mar Menor”. The evolution of price per square meter is analyzed since 2015, the year in which the degradation phenomenon of the “Mar Menor” began (the first major episode of phytoplankton proliferation).
  
  
• According to the Bank of Spain, the average profitability of an investment made in the “Mar Menor” in 2015 would be 0%, while in the South of Alicante it would have generated more than 43% in the same period. This differential behavior helps to visualize possible risks to financial stability, if instead of being limited to a specific area, they become generalized due to climate change (for example, a rise in sea level on the Mediterranean coast):

- Loss of wealth in households due to the impact on the value of their homes. In the case of the “Mar Menor”, estimates point to more than 4,000 million.

- Potential impacts on the conditions and credit quality of those loans that use as collateral homes affected by ecological degradation.