Benedikt Scheid
- 21 May 2025
- WORKING PAPER SERIES - No. 3059Details
- Abstract
- This paper provides the first study of climate risk pricing in euro area commercial real estate markets. We pay particular attention to changes in risk pricing over time, as a sudden market shift may significantly amplify the financial stability and macroeconomic implications of these risks. We find evidence of investors applying a penalty to buildings exposed to physical risk and that this penalty has increased significantly over the 2007-2023 period we study, particularly for properties exposed to risks associated with climate change. This change in pricing appears to have occurred in an orderly manner, with no implications for liquidity in the market for high risk buildings. In contrast, while pricing of transition risk has also increased over the period studied, towards the end of our sample the market response to transition risk appears to be playing out via market liquidity. This indicates that older buildings - which are more exposed to transition risks - may already be at risk of becoming “stranded assets”.
- JEL Code
- R33 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→Nonagricultural and Nonresidential Real Estate Markets
Q51 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Valuation of Environmental Effects
G2 : Financial Economics→Financial Institutions and Services
- 12 March 2025
- WORKING PAPER SERIES - No. 3036Details
- Abstract
- Physical climate risks can have a large regional impact, which can influence mortgage loans’ credit risk and should be priced by the lenders. Motivated by the relevance of climate change for financial intermediaries, our paper aims at analysing if physical climate risks are being reflected in residential real estate loan rates of banks. We show that on average banks seem to demand a physical climate risk premium from mortgage borrowers and the premium has increased over recent years. However, there is significant heterogeneity in bank practices. Banks that were identified as “adequately” considering climate risk in the credit risk management by the ECB Banking Supervision charge higher risk premia which have been increasing particularly after the publication of supervisory expectations. In contrast, the lack of risk premia of certain banks shows that ECB diagnostics in the Thematic Review on Climate were accurate in identifying the banks that need stronger supervisory focus.
- JEL Code
- G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
Q51 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Valuation of Environmental Effects
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
R32 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Real Estate Markets, Spatial Production Analysis, and Firm Location→Other Spatial Production and Pricing Analysis