Over the past three years, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney (now Governor of the Bank of England), tightened mortgage lending in an effort to avert a housing crisis that might otherwise result when interest rates rise.
While their efforts were laudable, they missed an equally great threat that is now on the landscape: The potential of extreme weather to render large sectors of the Canadian housing market uninsurable, which in turn could impact the mortgage market (without home insurance, you cannot qualify for a mortgage).
So, how can extreme weather, primarily in the form of torrential rain and flooding, threaten Canada's insurance and mortgage market?
At first glance there wouldn't seem to be a problem. To illustrate, as extreme rain of the type recently seen in Calgary and Toronto continues to flood basements en masse across Canada (and climate models point directly to this future), insurance companies could offset claims by raising premiums – homeowners might complain about higher premiums at first, but soon they would capitulate. Unfortunately, there is one lamentable flaw in this argument – homeowners do not have an endless supply of disposable income, as Mr. Flaherty perpetually reminds us, and at some point higher insurance premiums will become cost prohibitive for homeowners, which in turn will impact home sales and the mortgage market.
Losses being realized by property & casualty insurance providers in Canada are going up due to extreme weather and flooding. According to the Insurance Bureau of Canada, from 1990 to 2002 the collective premiums received by property insurers exceeded losses for each year, which was good. However, given the advent of extreme weather and flooding, this situation reversed itself over the period 2003 – 2012, with losses exceeding premiums for seven out of nine years, resulting in a total cumulative loss during this period of approximately $11-billion.
Clearly, the property & casualty sector in Canada has a big challenge to address. Indeed, Intact Financial Corporation (Canada's largest property & casualty insurer) confirmed in a July 22 press release, that it recorded an after-tax catastrophic loss of $123-million, net of reinsurance, in its second quarter alone. Intact CEO Charles Brindamour admonished that "the scope of the damage and destruction that we have witnessed in recent weeks [in Canada] is a stark reminder that we must adapt the protection offered to Canadians to ensure it remains sustainable in light of the greater prevalence and severity of weather events."
Heeding the advice of Mr. Brindamour, what should be done to address severe weather?
At least four courses of action should be pursued now. First, Canadian cities and towns should produce up-to-date maps of flood plains, which can then be used to provide guidance on where not to build houses. Second, we must weather-harden city infrastructure by increasing the permeability of our concrete-dominated urban spaces – bioswails (ditches filled with rocks and plants that are open on the bottom) and permeable surface parking lots should be common features of landscape design. Third, we must modify building codes to take adaptation measures into account: New homes, for example, should be mandated to have back-water valves installed in basement drains, thus preventing sewer back up. And lastly, we need to work aggressively with homeowners to help them better prepare their homes for extreme weather. This effort would include contouring around houses to direct water away from foundations, and ensuring that eaves and down spouts remain clear.
Taking a cue from insurance companies, some banks have entered the early stages of addressing extreme weather. For example, Scotiabank identified a variety of Alberta postal codes where additional scrutiny will be required to approve a mortgage given the exposure of these areas to recent unprecedented flooding.
In the absence of addressing extreme weather adaptation, Canada will select for an uninsurable housing market that will in turn impact the mortgage sector. Mr. Carney made a name for himself in Canada as a leader who helped avert a housing crisis – for Stephen Poloz, Canada's new Governor of the Bank of Canada, he might help to avoid another form of housing crisis borne of climate change – he could start by using his considerable influence to encourage governments and industry to weather-harden city infrastructure.
Blair Feltmate is associate professor, Faculty of Environment, University of Waterloo; Jason Thistlethwaite is assistant professor, Faculty of Environment, University of Waterloo