Highlights and Takeaways from AREUEA International in Curaçao

Alexander Carlo – Mortgage Markets and Climate Risk

I truly enjoyed the AREUEA 2024 International Conference. The presentations and discussions were excellent, and the participation of local experts from the pension funds sector, realtors, and policymakers added valuable perspectives. Among the academic papers, I particularly appreciated "Housing and Mortgage Markets with Climate Risk" by Issler et al. (2024). The authors investigate the impacts of wildfires on housing and mortgage markets using data from California wildfires between 2001 and 2020. They first develop a game-theoretic model to understand homeowners' decisions to rebuild or improve homes post-wildfire, considering neighborhood externalities and insurance. Then, they conduct an empirical study to test their theoretical hypotheses. Surprisingly, the findings reveal significant increases in house prices (up to 6%) and square footage (up to 1.46%) in affected areas five years after a wildfire, with minimal impact on mortgage terminations and no evidence of gentrification. Notably, there was no moratorium imposed. Additionally, the study highlights the challenges insurance companies face in absorbing wildfire losses without significantly reconsidering property and casualty insurance pricing. Overall, it was a very interesting paper at a fantastic conference! I'm already looking forward to next year's AREUEA conference.

Dongxiao Niu – Climate Risk and Bank Performance

The paper "Climate Risk and Bank Performance" by Vikas Soni (University of South Florida) looks into the intricate relationship between banks' exposure to climate risk and their overall performance. Soni introduces a novel Climate Risk Index (CRI) to quantify banks' exposure based on the climate vulnerability of their asset portfolios. The findings reveal that banks heavily exposed to climate risks suffer from poorer performance metrics across accounting, stock, and bond perspectives. This study highlights that during significant climate events, banks with higher climate exposure experience lower cumulative abnormal returns, indicating that investors are wary of such risks. Furthermore, banks with elevated climate risk face a higher likelihood of failure, merger, or acquisition, especially smaller banks that lack the robust buffers of larger institutions. This paper's innovative approach sheds light on the often-overlooked financial implications of climate change for the banking sector. The results not only contribute to the growing discussion on climate finance but also offer practical insights for policymakers and financial institutions aiming to mitigate climate-related vulnerabilities. This research exemplifies how emerging climate threats can destabilize the banking sector, emphasizing the need for proactive risk management and regulatory measures.

However, it's not all doom and gloom. On the other hand, banks are not merely passive players; they actively manage and hedge climate risks within their portfolios. Some banks diversify their loans' geographic distribution, securitize loans through GSEs, or mandate insurance purchases for collateral properties. These proactive measures suggest that the banking industry is swiftly advancing in climate risk management. We can expect to see more sophisticated strategies and tools being developed as banks become increasingly adept at mitigating climate risks. We also look forward to more research in the field of climate risk management in the banking industry.

Linde Kattenberg – Energy Efficiency and Housing Markets

One paper I found particularly interesting was the paper ‘Home Improvement, Wealth Inequality, and the Energy-Efficiency Paradox’ by Droës & van der Straten. The authors explore an interesting new research angle of energy efficiency in the housing market. Namely, they look at how different socioeconomic groups sort into energy-efficient homes and who of them retrofit existing homes. They then show what the distributional effect of this behavior is and how it is affected by public policy. Their results highlight that households’ income and wealth affect their likelihood of investing in ‘greener’ homes and making home improvements. The energy savings from living in a green home lead to a divergence in wealth accumulation of 17% of median net wealth. Households sorting in homes that are already energy efficient explains the largest part of this effect (65%). Moreover, the paper simulates multiple policy scenarios that could be implemented to make the building stock more energy efficient. Since low-income households are on average lower emitters, the paper highlights an interesting policy trade-off between reducing wealth inequality and maximizing CO2 reductions. Next to their academic contribution, the paper is therefore also highly policy relevant!

Martijn Stroom – Housing Supply

Gary Painter presented their insightful research on “Doubled-Up Homelessness” in Los Angeles. The study aimed to explore the prevalence and adverse consequences of doubling up due to increased rent burdens. Their presentation began by defining “doubled-up homelessness,” which occurs when households include non-nuclear family members due to financial hardship, resulting in unstable and overcrowded living conditions. Utilizing data from a household-level survey in South and Central Los Angeles, combined with information from Rent-o-Meter and the Urban Displacement Project, Painter and De Gregorio painted a unique picture of the issue. The research found that 42.5% of surveyed households were living with non-nuclear family members. Among these, 7% met the criteria for doubled-up homelessness: living with non-nuclear members, being at or near poverty, and experiencing overcrowding. The presentation highlighted the negative impacts of such living arrangements, including strained relationships, health issues, and lower educational attainment for children. The findings underscored the vulnerable nature of these households, which are one step away from literal homelessness. The presenters concluded by emphasizing the importance of addressing the root causes of housing insecurity and implementing policies to support these vulnerable populations. Interestingly, this definition of doubling-up stands at odds with a similar construction to promote house sharing to combat the Dutch housing shortage. Painter showed that the crowdedness factor, measured by inhabitants per room, could be a driving factor in the negative effects of doubling up. More work is still to come!

Stefan Flagner – Healthy Buildings

Is a “health premium” the next evolutionary step after the green premium. Years of research provide mounting evidence that investing into the energy efficiency of buildings to make them green and sustainable will provide a favorable return on investments. However, economists advanced into a new line of research in this field: Making a building not just green but also creating a healthy and performance-enhancing indoor environment. The AREUEA conference had a session about such healthy buildings, providing novel evidence if and how such investments into the indoor built environment can be profitable. New certification schemes such as WELL and Fitwell emerged which - compared to LEED or BREEAM - have a strong focus on creating a healthy indoor air quality, comfortable thermal environment and optimal lighting conditions to foster building occupants’ comfort, health and work performance. Preliminary results indicate already that WELL and Fitwell certified buildings can provide a premium return, but a lot of research still needs to be done on that topic. Seemingly unconnected to this topic was a paper about the impact of the current working from home trend on the office market. The question in room discussed was how to encourage workers to come back into the office. Maybe a healthy indoor environment can help with that?!

Marlene Koch - Portfolio Choice and Consumption

All the talks I attended during the 2024 AREUEA International Conference were of excellent quality and highly interesting. However, the paper by Kasper K. Balke, Markus Karlman, and Karin Kinnerud on downpayment requirements and their implications for portfolio choice and consumption really caught my attention, as the topic is relevant not only for academics but also for policymakers.

The share of countries that impose downpayment requirements on their citizens has significantly risen in the last 30 years (from 6% in 1990 to over 60% in 2020). Not only did the share of countries that imposed such a constraint increase, but simultaneously, the constraint was severely tightened. The average downpayment requirement in 1990 was around 3% and increased by 17 percentage points until 2020. The authors use two models to study the interplay of such tightened borrowing constraints and housing choices: a stylized model that allows for an analytical solution of individuals’ optimal consumption, savings, and housing decisions and a rich quantitative overlapping generations model that provides deeper insights into the economic drivers of the results.

Both models predict that stricter downpayment requirements postpone individuals’ housing market entry, lead to individuals accumulating savings later, and have significant welfare costs. While the finding of postponed housing market entry is economically intuitive and can be explained by young individuals’ liquidity constraints and challenges to accumulate sufficient liquid savings, the finding of the later accumulation of savings requires more economic reasoning. The authors argue that a stricter constraint increases the cost of saving as being required to accumulate a higher level of total savings forces individuals to deviate further from their optimal consumption path.

The paper’s key findings shed light on individuals’ consumption, savings, and housing choices under the presence of legislative constraints and have highly relevant implications for monetary policy and fiscal transfers.

Bonus takeaway (Visiting professors Avis Devine & Rogier Holtermans)

Academic conferences provide important opportunities for academics to gather and learn about new research - bouncing ideas off each other, vetting topics and methodologies. However, it can create a bit of an “academic echo chamber.” The potential reach and impact of academic research is much greater when we actively engage with the industry as well. Stakeholders across the built world can help us identify relevant and topical research questions, data sources, partnership opportunities, and help us identify possible blind spots.

The presence and participation of local organizations, such as Algemeen Pensioenfonds Curaçao (APC) and Vidanova Bank, as well as voices from major industry organizations from abroad, such as Nareit and Russell Investments, added significant value to AREUEA International 2024. Their presence was felt throughout the conference, and favorite interactions of ours included panel discussions blending industry and academic points of view on topical issues such as institutional investment, climate risk, and health within buildings, as well as the site tour of a key redevelopment project in downtown Curaçao.

We had two major takeaways from the industry presence in Curaçao. First, we learned about limitations to the applicability of the research we conduct on major/mainland markets to small island economies. The industry participants helped us tease apart examples of what can be instituted, and where broad applicability falls short. Second, we learned that ignoring such differences when visiting a new location reduces the impact of organizing a conference in such a setting. Wherever we go for a conference, as lifelong students of the built world, we should make sure to incorporate opportunities to learn from the local markets we visit.