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Climate Change Risk and the Cost of Mortgage Credit
[Does climate change affect real estate prices? Only if you believe in it]

Author

Listed:
  • Duc Duy Nguyen
  • Steven Ongena
  • Shusen Qi
  • Vathunyoo Sila

Abstract

We show that lenders charge higher interest rates for mortgages on properties exposed to a greater risk of sea level rise (SLR). This SLR premium is not evident in short-term loans and is not related to borrowers’ short-term realized default or creditworthiness. Further, the SLR premium is smaller when the consequences of climate change are less salient and in areas with more climate change deniers. Overall, our results suggest that mortgage lenders view the risk of SLR as a long-term risk and that attention and beliefs are potential barriers through which SLR risk is priced in residential mortgage markets.

Suggested Citation

  • Duc Duy Nguyen & Steven Ongena & Shusen Qi & Vathunyoo Sila, 2022. "Climate Change Risk and the Cost of Mortgage Credit [Does climate change affect real estate prices? Only if you believe in it]," Review of Finance, European Finance Association, vol. 26(6), pages 1509-1549.
  • Handle: RePEc:oup:revfin:v:26:y:2022:i:6:p:1509-1549.
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    File URL: http://hdl.handle.net/10.1093/rof/rfac013
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    Cited by:

    1. Kendra Marcoux & Katherine R. H. Wagner, 2023. "Fifty Years of U.S. Natural Disaster Insurance Policy," CESifo Working Paper Series 10431, CESifo.
    2. Corina MURAFA & Theodor COJOIANU, 2023. "Financial Instruments for Decarbonization: Likely Pathways in the Romanian Economy," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 24(2), pages 198-209, May.
    3. Leonardo Gambacorta & Salvatore Polizzi & Alessio Reghezza & Enzo Scannella, 2023. "Do banks practice what they preach? Brown lending and environmental disclosure in the euro area," BIS Working Papers 1143, Bank for International Settlements.
    4. Chongwu Xia & Chong Guan & Ding Ding & Yun Teng, 2024. "Navigating Success in Carbon Offset Projects: A Deep Dive into the Determinants Using Topic Modeling," Sustainability, MDPI, vol. 16(4), pages 1-19, February.
    5. Aslan, Caglayan & Bulut, Erdem & Cepni, Oguzhan & Yilmaz, Muhammed Hasan, 2022. "Does climate change affect bank lending behavior?," Economics Letters, Elsevier, vol. 220(C).
    6. Garbarino, Nicola & Guin, Benjamin & Lee, Jonathan, 2022. "The Effects of Subsidized Flood Insurance on Real Estate Markets," Bank of England working papers 995, Bank of England.
    7. Loa, Patrick & Hossain, Sanjana & Liu, Yicong & Nurul Habib, Khandker, 2022. "How has the COVID-19 pandemic affected the use of ride-sourcing services? An empirical evidence-based investigation for the Greater Toronto Area," Transportation Research Part A: Policy and Practice, Elsevier, vol. 155(C), pages 46-62.
    8. Schaefer, Kerstin J. & Tuitjer, Leonie & Levin-Keitel, Meike, 2021. "Transport disrupted – Substituting public transport by bike or car under Covid 19," Transportation Research Part A: Policy and Practice, Elsevier, vol. 153(C), pages 202-217.
    9. Gasparini, Matteo, 2023. "Are financial markets pricing the net zero carbon transition? A reconsideration of the carbon premium," INET Oxford Working Papers 2023-23, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    10. Shouwei Li & Xin Wu, 2023. "How does climate risk affect bank loan supply? Empirical evidence from China," Economic Change and Restructuring, Springer, vol. 56(4), pages 2169-2204, August.
    11. Gazi I. Kara & Youngsuk Yook, 2023. "Policy Uncertainty and Bank Mortgage Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 783-823, June.
    12. Hao Dong & Tao Li, 2023. "Climate Economics and Finance: A Literature Review," Climate Economics and Finance, Anser Press, vol. 1(1), pages 29-45, November.
    13. Alexandra Lefevre & Agnes Tourin, 2023. "Incorporating Climate Risk into Credit Risk Modeling: An Application in Housing Finance," FinTech, MDPI, vol. 2(3), pages 1-27, September.
    14. Elsa Allman, 2022. "Pricing climate change risk in corporate bonds," Journal of Asset Management, Palgrave Macmillan, vol. 23(7), pages 596-618, December.
    15. Garbarino, Nicola & Guin, Benjamin & Lee, Jonathan, 2022. "The Effects of Subsidized Flood Insurance on Real Estate Markets," Bank of England working papers 995, Bank of England.
    16. Carè, R. & Weber, O., 2023. "How much finance is in climate finance? A bibliometric review, critiques, and future research directions," Research in International Business and Finance, Elsevier, vol. 64(C).
    17. Michael C. S. Wong & Ho Ming Ho, 2023. "A Framework for Integrating Extreme Weather Risk, Probability of Default, and Loss Given Default for Residential Mortgage Loans," Sustainability, MDPI, vol. 15(15), pages 1, August.
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    More about this item

    Keywords

    Bank loans; Residential mortgages; Climate change risk; Sea level rise; Securitization;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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