What is the economic impact of climate change and environmental degradation? The case of house prices in the Mar Menor area
A combination of extreme weather events and environmental degradation in the Mar Menor has resulted in real estate losses of more than €4 billion in the area. This figure is ten times the amount earned over the last 20 years from converting the surrounding land into irrigated farmland (one of the main drivers of the environmental degradation).
Climate change has increased the frequency and severity of extreme events, such as droughts and floods, around the world. These weather events can be very damaging in fragile and highly-stressed ecosystems and can have serious economic consequences. In this post we analyse the case of the environmental degradation of the Mar Menor
and its impact on house prices in the surrounding area.
The origin of the problem
The Mar Menor is Europe’s largest saltwater lagoon. Coastal lagoons are designated by the European Union Habitats Directive as vulnerable areas in need of urgent environmental protection. But human activities often place these areas and their surroundings under considerable environmental strain.
In recent decades the Mar Menor has seen a major expansion in agriculture and the agrifood industry. This has led to a gradual deterioration in the lagoon’s water quality, due to the inflow of nutrients such as nitrates and phosphates. Tourism and urban development, which began in the 1960s, have also had a negative impact on this ecosystem.
At the same time, more frequent flooding and temperature extremes in the region due to climate change increase the influx of nutrients, making them more likely to reach very high levels (eutrophication) and leading to episodes of excessive growth of harmful algae – also known as harmful algal blooms (HABs) –, as we have seen since 2015.
Environmental degradation, public perception and economic impact
In a recent article we analysed the economic impact of the 2015 HAB in the Mar Menor.
Although the environmental degradation of the lagoon had been studied before, it wasn’t until then that the public became aware of the scale of the damage.
That year’s HAB was severe and hit the local population hard. Since then, there have been several episodes where the colour of the water has changed (“green soup”) and marine animals have perished. These incidents have been widely reported in the press, worsening the public’s perception of the situation in the Mar Menor since 2015. Chart 1 shows that tweets about the lagoon have become increasingly negative since that year.
Chart 1
THE TONE OF THE TWEETS REFLECTS A WORSENING PUBLIC PERCEPTION OF THE MAR MENOR
SOURCE: Twitter and Banco de España
NOTE: Proportion of positive, negative and neutral tweets (weekly frequency).
How can we measure the economic impact of this environmental degradation and tarnished reputation? By looking at house prices in the Mar Menor area.
House prices reflect what people are prepared to pay to live in a particular area. They are a useful means of gauging the economic impact not only on the housing market, but also more broadly, since they are also indicative of economic activity in a geographical area.
The Mar Menor offers an ideal case study, with episodes such as the HAB of 2015, which marked a major shift in environmental awareness. A comparison with densely populated neighbouring tourist areas with similar types of houses untouched by environmental degradation (such as southern Alicante) provides a very useful benchmark.
The environmental degradation of the Mar Menor has resulted in a 43% lower return on investment for property owners than in neighbouring areas
Chart 2 shows the key finding of the analysis: when the extent of the environmental degradation in the Mar Menor became clear to the general public, house prices in the area stalled, in contrast to a 43% increase in southern Alicante over the six years following the HAB of 2015. Thus, for homeowners in the Mar Menor, the return on their investment was 43% lower than in similar neighbouring areas. Given the number of residential properties in the area, the total loss in real estate asset value was more than €4 billion.
Chart 2
HOUSE PRICES HAVE STALLED COMPARED WITH OTHER NEIGHBOURING AREAS
SOURCE: Colegio de Registradores and Banco de España.
NOTE: House prices per square meter in the Mar Menor and southern Alicante (control area). The price is set at 100 for 2015 and the median or intermediate point of the distribution is taken for both areas.
To put this figure into perspective, €4 billion represents around 10 times what the agricultural sector has earned by switching from dry farming to irrigated crops over the last 20 years. According to the available scientific evidence, this switch contributed significantly to the lagoon's environmental degradation.
Protecting the environment is costly in the short term, but this is far outweighed by the long-term benefits (including economic ones)
Our research highlights some of the adverse economic consequences of climate change-related environmental degradation. It is a stark reminder of the pressing need to take measures to safeguard our ecosystems and mitigate the risks associated with climate change, which often only become apparent once they have materialised.
Investing in protecting the environment can be costly in the short term, but this is far outweighed by the long-term benefits in terms of both the health of the ecosystem and of economic growth and financial stability.
DISCLAIMER: The views expressed in this blog post are those of the author(s) and do not necessarily coincide with those of the Banco de España or the Eurosystem.
