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Sustainable Finance Insights

June 2022

Wildfires, housing affordability and climate change: virtuous cycle or dangerous dynamic?

Research report

Catastrophic wildfires are expected to be ~15% more likely across the U.S. by 2060, assuming a business-as-usual carbon emissions trajectory in the coming decades, which would increase annual average economic damage from wildfires by ~8%. Based on our analysis, upper bounds on our climate model projections imply increases in wildfire risk could be substantially higher in a worst-case scenario.

  • Driven in large part by constricted housing supply, human settlement in wildfire-prone areas has increased significantly over the past several decades. Populations that now live in high wildfire risk locations are disproportionately non-White and, in particular, Latinx, and spend disproportionately more income on housing costs.
  • Lack of access to affordable urban housing also exacerbates automobile dependence and carbon emissions. California has a “hidden liability” of more than $2B on its balance sheet from on-road emissions alone, and those emissions contribute to the climate change that makes its own wildfire risk worse.
  • The Government Sponsored Entities (“GSE”) that are mandated to help make home ownership more accessible and affordable are disproportionately exposed to wildfire risk. Ginnie Mae, the only GSE which cannot pass risk onto the market, holds approximately twice the extreme risk on its books compared to mortgage lending institutions.
  • Even after accounting for affluence, loan-to-value and other key credit risk metrics, mortgage delinquency is significantly more likely in locations exposed to high wildfire risk, implying higher default likelihood that has direct implications for mortgage-backed securities, and via the likes of Ginnie Mae, for the US taxpayer.
  • More effective urban densification centered on affordability can turn this dynamic into a virtuous cycle, at once reducing wildfire risk, reducing transportation emissions, and advancing climate and social justice. This is a policy issue at state, county, and city levels, but one where the financial community can play an active role.

All data and charts used in this report are based on data obtained by ICE Data Services and available via its product offerings, unless otherwise cited.

Read more in our research report