Canada's resilient real estate market offers confidence in a world of climate uncertainty

As the world is rocked by more frequent and severe climate disasters, investors must increasingly weigh the climate risk of real estate. A new study from the John Molson School of Business provides a comprehensive assessment of how Canada’s real estate market can remain well-positioned.

"We are seeing that yes, Canada is affected by climate change — higher temperatures, more frequent wildfire and other impacts," says Erkan Yönder, associate professor of finance and real estate at the John Molson School. "But the effect is more muted than in the United States, and our data show that demand for Canadian real estate is poised to remain strong."

Yönder is also the director of the climate risk and finance impact lab at the John Molson School’s Climate Business Institute.

The North Effect

The data analysis was the most challenging part of the study — specifically, how to isolate the impact of climate change on property values.

Yönder’s solution was to use immigration statistics as a proxy for demand. After determining the climate exposure of both Canada and the United States based on hot-degree days and regions affected by wildfires, he mapped this data against yearly immigration figures, controlling for economic factors.

The results overwhelmingly show that climate change is reducing immigration to the United States but maintaining — or even increasing — demand to live in Canada.

Yönder also considered the climate risk of immigrants’ home countries. “Our analysis represents the pure impact of climate exposure,” Yönder explains. “We see that residents from countries that are more affected by climate change are more likely to prefer to move to Canada. It’s climate migration.”

One explanation for the findings is what Yönder calls the “North Effect.” Although Canada and the United States are heating by similar degrees, Canada is starting from a colder average, whereas some regions of the United States are pushing into more inhospitable temperatures.

Impactful partnership

This research is the second output of the Equiton Research Fund in Real Estate at John Molson, a partnership between private equity firm Equiton and Yönder to support innovative research into Canada’s real estate investment landscape.

The first paper used artificial intelligence (AI) to predict the future cost of rent and was widely disseminated among policymakers, with citations even reaching the floor of the House of Commons.

These latest findings add to evidence from the earlier study, highlighting the critical need to increase housing supply in Canada.

“Our growing population needs it, and now we see that building here has an even more attractive risk-return profile for investors who have real estate holdings globally,” explains Aaron Pittman, senior vice-president and head of Canadian institutional investments at Equiton.

Planning for the future

The results are also important for the Canadian public, as roughly two-thirds of the country’s wealth is tied up in real estate. This is not just homeowners living in their properties as assets, but also major investment tools such as pension funds with stakes in large developments.

The research highlights two important considerations. The first is that all levels of government in Canada should actively develop policies related to climate migration.

The second is that further research would benefit from greater transparency in climate data.

"We wanted to incorporate flooding into our study,” Yönder notes. “But we had no public data on the impact of floods — how many houses, what was the cost. The data are held privately, but we need more transparency in climate data so that individuals are more aware of risks and we can collectively plan better for the future."

Read the cited research by Erkan Yönder and the Equiton Research Fund in Real Estate at the John Molson School of Business.