Tuesday, December 05, 2006

Global Warming to Destroy the Economy?

There's an old church hymn that we used to sing when I was a kid:

Don't build your house on a sandy land,
Don't build it too near the shore!
Though it might look kinda nice,
You gotta build it twice,
You gotta build your house once more!

You gotta build your house on a rock!
A firm foundation on a solid spot,
Though the storms may come and go,
But the peace of God you will know!

I always assumed that the song was an allusion to Matthew 7:24-29. But I was wrong. It turns out that the Church was giving us excellent real estate advice, because global warming is reshaping the housing market.

"There are horror stories about the frequency and severity of hurricanes increasing," Reactions reported in September. That plus the skyrocketing number and value of properties on the U.S. coastline "has prompted many to question whether it is possible to write catastrophe business profitably."

At all.

"If you feel the price is not right, you pull out," matter-of-factly acknowledges Kurt Karl, head of economic research and consulting with Swiss Re in New York.

Since 1971, "Insured U.S. weather-related losses are growing 10 times faster than premiums and the overall economy," reports Ceres, a coalition whose observations get attention from the big boys in part because they've built a climate-risk network that includes 50 institutional investors managing more than $3 trillion.

In order to get a mortgage, you need to purchase the proper insurance. The bank won't lend you money unless they know that someone is going to pay them if your investment gets knocked over by a hurricane or destroyed by flooding. Without insurance you can't build or buy a home, run a businesses, or even operate government buildings.

50% of the U.S. population lives within 50 miles of a coast. And the cost of insuring anything with a high risk of being destroyed by weather is in the process of skyrocketing, because the incidence of destructive weather is increasing, and ocean levels are rising. You can attribute these changes to whatever you want. But the insurance industry is phenomenally good at accurately measuring risk, and we will all be literally paying the cost of that increased risk quite soon.

The question is, how will we respond to this economic incentive?

My guess is that people will naturally migrate towards cheaper inland real estate, and local officials will improve building codes to help withstand disasters.

A large scale cutback of greenhouse gases would be great, but I doubt we'll be increasing CAFE standards any time soon. If Manhattan was projected to be underwater in less then ten years and you gave Americans a choice between building trillion dollar 100 foot flood walls around the city or giving up SUV's, our first response would be, "I know a guy in Jersey who can give us a great deal on concrete."
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