Incorporating the Impact of Climate Change into Models Related to Housing and Housing Finance

PDF - Report

We commissioned Prism Economics and Analysis to do a literature review of the economic modelling of climate change and how it relates to housing and housing finance. This study deepens our understanding of climate change models used to assess risks. This work includes a descriptive bibliography to allow researchers to quickly determine what climate change factors can be incorporated into their research.

Author:: CMHC
Document Type:: PDF
Date Published:: October 28, 2022

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Key findings

Partial Equilibrium, Computable General Equilibrium and Dynamic Stochastic General Equilibrium models can provide useful housing supply and demand guidance. These models can also help to determine higher construction and operations costs and changes in price dynamics due to changes in perceived risk.
Integrated Assessment Models, Agent-Based Modelling, and Catastrophe Models are essential to understanding climate change. They help assess factors such as the impacts of:
- changes in housing design
- heterogeneous demand patterns and risk perceptions
- disclosure of information and the appropriate pricing of catastrophic risk
None of the above models are suited to analyze the financial risks of climate change. Traditional risk management tools can be augmented with climate change factors to fill this gap. These include:
- value-at-risk analysis
- scenario construction for stress testing
- credit scoring

Implications for the housing industry

This work allows researchers and industry professionals to determine the best model to analyze a specific climate-related issue. No model can capture all the implications of climate change on housing. Incorporating climate change into current modelling fills the gap in understanding the link between housing affordability and climate change. Climate change impacts on housing supply and demand and how risk is distributed through the financial system are especially relevant.