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Just How Big Could the Brittleness Bubble Get?
How might we get a sense of the coming drop in home prices and asset values?
Can we put a price tag on the Brittleness Bubble?
The Brittleness Bubble, you’ll remember, is the unaddressed overvaluation of assets threatened by the unacknowledged risks brought on by the planetary crisis. In my last letter, I mentioned the difficulty of predicting its magnitude.
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It’s hard to assess the magnitude of the Brittleness Bubble. In the roughest terms, we might hold in mind a loss of financial value on the order of the Subprime Crisis and Great Recession, if unfolding more slowly.
Several readers asked if it were possible to get a little more precise. This seems like an interesting thought experiment. (To prevent this from becoming a book in itself, I’ll confine myself to the American experience.)
There’s some brand new research to start with. A study in Nature, “Unpriced climate risk and the potential consequences of overvaluation in US housing markets,” finds that American “residential properties exposed to flood risk are overvalued by US$121-US$237 billion…” with a central estimate of $187 billion.
Is that our number then? $187 billion?
A rapid $187 billion repricing of flood-vulnerable homes would be a serious correction (though smaller than the late 2000s housing crash).
A Brittleness Bubble of that size would be horrible for those directly hit. It would not, in itself, be a societal catastrophe. Indeed, a total of $187 billion is only slightly more than the $165.1 billion that NOAA estimates climate-worsened disasters cost the US last year (2022).
But as solid as this study seems to be — it has so far to have been well-received by relevant experts — this estimation is likely nowhere near the true magnitude of the bubble we face.
To begin with, these numbers are surely conservative estimates of total unpriced flood risk. (Take, for instance, the growing risk of historically unprecedented rainfall events.)
Even where flood insurance remains available, prices could skyrocket — for instance, in Florida, where a predicted rise of reinsurance costs will hike premiums, strain household budgets and drive more homeowners into Florida Citizens, the state’s public insurer.
(Public insurers of uninsurable properties are inherently unstable. Since premiums don’t cover payouts, they basically just shift the cost of growing risks from the policy-holders to other taxpayers. Since the likelihood of massively expensive, unprecedented disasters is increasing, government insurance programs face potentially crippling losses in truly catastrophic scenarios. Flood insurability challenges will almost certainly worsen in the absence of large-scale Federal interventions, which look pretty unlikely in the near term.)
And flooding, while relatively easily predicted and studied, makes up just one vector of risk. Many parts of the country are becoming uninsurable against a range of unnatural disasters. The threats we face today are myriad — flood, fire, tropical storms, heat waves, drought and aridification, threats to agriculture (from crop pests to greater erosion of topsoil), ecosystem disruptions, the spread of contagious diseases, etc. They are also compound, interwoven and cascading. Almost none of that risk is yet priced into market values.
The piled-up threats may well pop the inflated values of individual properties, but a lot of the damage of that coming devaluation falls heavily on their communities, as it triggers other losses, for example loss of local property taxes.
The Washington Post summed up the implications of increased flooding risk for local governments:
“[This flood risk study], which includes researchers from the Environmental Defense Fund, Resources for the Future and the Federal Reserve, also details how municipal governments that rely heavily on property taxes could face huge budget shortfalls as flood-prone homes lose value or become uninhabitable. … the projected inundation of so many homes, while tragic for individual owners, promises to erode the revenue that many local governments need to operate.”
In the U.S., local governments are the front line of public response to climate vulnerability. Yet many cities and counties are already struggling to meet their obligations, and look likely to be swamped by losses of tax revenue and waves of new costs, from the urgent (and costly) need to protect or rebuild infrastructure designed before acknowledgment of the planetary crisis, to the sharply escalating need for social programs to meet widespread displacement.
Again, one of the main points of failure is the fiscal capacity of local government to govern. Gilmore, Kousky and St. Clair show in a recent paper, “Climate change will increase local government fiscal stress in the United States,” that impacts and risks are stressing municipalities’ budgets in a variety of interconnected ways. Without the public funds to defend essential infrastructure, redesign old systems and invest in the future, inertia guarantees worsening losses.
In addition, those straining local governments are working in an extremely volatile economic landscape. Climate and ecological impacts bring a range of discontinuous risks to all economies and financial institutions. Some of the most vulnerable places will take multiple economic hits. Climate change and ecological collapse cause major losses directly. Local economies also face the disruption of the Carbon Bubble — the loss of value from too-long-delayed moves away from high-carbon and unsustainable practices (whose externalities society is no longer able to bear). Here in the U.S. many of the middle and working class people likely affected are already facing precarity and uncertainty. Many are unprepared for the truth that the help they’ll probably expect ain’t coming, adding costly political conflict to the other headwinds vulnerable places face.
An oarless boat moves only with the current. Economic contraction keeps brittle places tied to outdated systems and powerless to reduce vulnerabilities. To regain some strategic initiative — to be able to choose actions that increase future options — cities and regions will need to emphasize both ruggedization and the creation of new value.
That demands major new investments in local ruggedization efforts on scales able to transform cities and regions to resist future harm — thus moderating disasters and attracting further investment. It also requires drawing the new businesses and residents needed to replace lost local jobs and bolster tax revenues. Finally, it means centering ruggedization and innovation in all public investments. As I’ve said before, “If a city has a climate plan, but that plan is not the city's core strategy document, it doesn't really have a climate plan.”
Each one of these is a heavy lift. Those places unable or unwilling to make those investments can expect an economic downspiral, where losses of capacity fuel greater exposure and more devaluations, which in turn reduce local capacities, and so on.
It’s pretty hard to put a number to that kind of plunge into the maelstrom. It seems grimly probable that some communities will effectively go to zero, becoming hollow shells of their former selves. Imagine, for instance, the worst of rust-belt urban decline, but in places that are repeatedly battered by new weather extremes.
If we take too long to level with ourselves about the magnitude of the problem, act too slowly to ruggedize and retool, or even just get extremely unlucky with the magnitude of climate chaos, the financial crash will be brutal and many more places than any of us would like to admit are soon to become what Bruce Sterling calls “the ruins of the unsustainable.”
On the other hand, we could get lucky. Honesty about the overvaluation of the unsustainable can limit the financial turmoil involved. Sensible triage can make protecting still-salvageable places and systems more realistic. Future climate damage can be ruggedized against. New investments can spur gains in sustainable prosperity. Tens of millions of people can be pulled back from the mouth of the maelstrom.
How big will the Brittleness Bubble be? We don’t know, yet. But it looks like the product of five current factors that we can learn to anticipate but not yet predict:
The eventual magnitude of the planetary crisis itself, determined largely by how quickly we act, especially in this decade.
The severity of the local climate/ecological risks (and combinations of risks) generated by that crisis, and the degree to which vulnerability is allowed to grow and spread (by, for instance, continuing to build in flood plains).
The pace at which awareness of climate and ecological risks undermines the current value of properties and assets, co-acclerating wider local losses in investability, insurability and governmental capacity.
The degree to which cities and regions are willing (and able) to quickly ruggedize, innovate and change economic priorities to reduce risk and increase insurability, investability and new development.
The scale at which national actions will be taken to help local and regional governments better weather the storm.
I’ll close with this last unknown, in the U.S. context.
Let me geek even harder than I normally do: The White House’s brand new Economic Report of the President has a fantastic chapter, “Opportunities for better managing weather risk in the changing climate.” Want a tool for imagining how some bold-but-realistic Federal responses to climate risk might work? This is for you.
It proposes four “potential pillars” of federal climate response strategy: increasing the availability of knowledge about climate risk; a investing in long-term strategic planning and planning capacities; working to ensure accurate pricing of climate risk; protecting the vulnerable.
The authors limit themselves to the fairly plausible, which precludes meaningless demands for fantasy programs like universal buy-outs of properties at risk, or the defense of every community and asset, no matter how expensive such defense would be. I suspect we’re still a long way from fully implementing even the kinds of proposals in this report. The point, though, is that they could be implemented — and make a difference.
Taking these kinds of steps would not make climate risk and brittleness go away. It might, though, narrow the gap between current market expectations and realistic valuations, thus deflating the size of the bubble of overpriced assets we face.
Even with the planetary crisis raging around us, we are not helpless.
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