The Effect of Wildfires on Mortgage Pricing: Evidence from Portugal

Abstract

In 2017, parts of Portugal experienced unprecedented wildfires. We use these as a natural experiment to examine the extent to which banks operating in Portugal accounted for this exogenous environmental shock in their mortgage origination conditions. We employ a diff-in-diff framework on granular securitized mortgage data, which have not been used to explore the impact of natural disasters. Our results show that banks reacted to the wildfire disaster by charging a premium on interest margins. This premium is less visible in areas close to the wildfires than in wider geographical areas around the fires. We find the risk premium to be most pronounced for borrowers with lower incomes. For this group, the risk premium amounts to 22 bps compared to 13 bps for the average borrower.