Low-income homeowners in flood zones risk becoming ‘climate prisoners’

Climate change-related flooding poses growing systemic threats to the British residential property market, insurance sector and mortgage lending system, academics have warned.

Researchers at Bayes Business School’s Real Estate Research Centre (part of City St George's, University of London) said that flood risk alone could soon render some homes uninsurable and un-mortgageable – with low-income homeowners in ‘at risk’ areas hardest hit. The centre is stepping up its work on the impact of extreme weather events linked to climate change on the UK 's residential property market and related sectors  - including insurance and banking.

The team analysed household income data and flood risk scores at a postcode level to replicate the data modelling approach insurance companies use to determine home insurance premiums. This produces an ‘average annual loss’ (AAL) for each home – the cost of repairing damage to a particular home over a given year. Premiums generally rise with higher AALs. Where modelled losses are particularly high insurers may restrict coverage or withdraw entirely.

Low-income homeowners in flood-prone areas, they found, face a flood-related AAL 3.7 per cent higher than their neighbours on better incomes – which will be directly reflected in insurance premiums.

The report says: “These disparities are projected to grow to 4.4 per cent by 2050 and low-income people have less capacity to relocate – increasing the likelihood of many becoming climate prisoners stuck in deteriorating, uninsurable homes.”

Around 4 million British homes are in areas of medium or high flood risk, with concentrated exposure in regions such as the Thames estuary, south west England and parts of Yorkshire.

Dr Nicole Lux, project director for real estate debt research at Bayes, said: “Climate risks are reshaping the UK home insurance market and changing how the mortgage lending and property markets function. As insurers shift toward risk-based pricing and reinsurers tighten capacity, we are seeing the emergence of affordability pressures and coverage gaps – particularly in high-exposure regions. We have also highlighted real issues around economic equity in terms of sharing the burden of climate change-related weather events.”

Research partners sought to step up work

Dr Lux said the research centre is working closely with UK residential mortgage lenders and insurers – and other industry partners such as Twinn Haskoning – to improve property level data and develop a better approach to property-level climate risk pricing. However, she said, the centre is looking to forge new partnerships to support the ambitious additional research plans around these challenges.

She said: “Earlier research suggested that the economic and financial burden of higher insurance premium and complete coverage loss could disproportionally affect low-income households, raising concerns about the equity and affordability of climate risk pricing. That is why further research, and collaboration between policymakers, researchers and sector leaders, is essential to developing effective, inclusive responses to these emerging challenges."

The paper urges the government and the insurance sector to extend or replace a joint government/insurance industry risk-pooling system, Flood Re, that expires in 2039. The alternative, it says, risks a ‘cliff edge’ moment that will tip millions into financial distress, threatening the stability of lenders and insurers. The scheme was launched in 2016 to provide flood insurance coverage to domestic properties deemed at significant risk of flooding.

The paper draws on another paper they published last year which reveals that flood-exposed properties typically sell for around 8 per cent less than similar properties nearby. Homes in high-risk areas face discounts of over 30 per cent. That risks triggering default losses for a mortgage where the loan is over 70 per cent of the home’s value.

The paper highlights other data published by key players in the insurance, finance and lending sectors, including:

• The average cost of repairing a flood-damaged home following the 2020 storms was £33,600, according to Association of British Insurers’ data.
• Swiss Re estimated that the UK’s ‘natural catastrophe protection gap’ over the ten-year period from 2015 to 2024 was 22%, which means that approximately one-fifth of total economic losses from natural disasters, around £1.5 billion, were not covered by insurance.
• NatWest estimated last year that 3.1 per cent of its mortgage portfolio lies in high flood risk zones and 1.6 per cent in very high-risk areas. Lloyds Banking Group, the UK’s largest lender, says that 3.7 per cent of its mortgage book is in the two categories.

Dr Mark Andrew, lead author of the paper, said: “These numbers highlight the importance of continued research in this area to improve understanding and develop data-driven policy in government and effective responses from the insurance, lending and real estate sectors.

“We plan to explore and quantify how information about physical climate risks is shared with lenders, households and the organisations involved in shaping regional housing markets – including developers, local authorities, social landlords and investors. We will also identify potential systemic risks in the UK financial markets.

“Climate change presents a significant financial risk to the UK housing system, with flooding and subsidence driving up insurance claims and premiums. The Bank of England and Prudential Regulation Authority have cautioned that many properties could become uninsurable or be tipped into negative equity, posing risks to lenders."