The effect of information about climate risk on property values

Authored by pnas.org and submitted by mvea

Understanding whether markets efficiently price environmental risk is critical to policy design, particularly as key climate risks change rapidly. We conduct a nationwide analysis of the extent to which the US housing market prices information about flood risk contained in publicly available flood maps. Using data on millions of home sales, we find that information in these maps is not fully capitalized in property values. Lack of information appears to contribute to underpricing: More sophisticated commercial buyers and more risk-aware buyers respond more to floodplain information. This underpricing increases incentives to develop in hazardous places. Enhanced communication of flood risk could help ensure such risk is appropriately reflected in market outcomes.

Floods and other climate hazards pose a widespread and growing threat to housing and infrastructure around the world. By reflecting climate risk in prices, markets can discourage excessive development in hazardous areas. However, the extent to which markets price these risks remains poorly understood. Here we measure the effect of information about flood risk contained in regulatory floodplain maps on residential property values in the United States. Using multiple empirical approaches and two decades of sales data covering the universe of homes in the United States, we find little evidence that housing markets fully price information about flood risk in aggregate. However, the price penalty is larger for commercial buyers and in markets where buyers are more risk aware, suggesting that policies to improve risk communication could influence market outcomes. Our findings indicate that houses in flood zones in the United States are currently overvalued by a total of $43.8 billion (95% confidence interval: $32.6 to $55.6 billion) based on the information in publicly available flood hazard maps alone, raising concerns about the stability of real estate markets as climate risks become more salient and severe.

feochampas on May 1st, 2021 at 12:47 UTC »

I grew up next to a river. When I was kid it flooded every other year. The fields below my house would turn into giant ponds. White swans would stop by. It was very pretty.

We lived on a hill. Watching a river crest and houses destroyed is scary af. I rode a bus to school. During a high river, I could see the river was even with the levees we were driving past. The water was at least ten feet higher than the fields on the other side. Sometimes the levees held, sometimes they didn't.

I cannot understand how anyone can live in a floodplain. Flowing water is scary af you guys.

whatinthecalifornia on May 1st, 2021 at 12:43 UTC »

Can someone please provide the cover graphic here for me?

acrewdog on May 1st, 2021 at 11:53 UTC »

The terrifying thing to me is the billions of dollars in real estate investments in places like Charleston SC, and Miami Beach where king tides are already flooding streets. Historic buildings (some if which are homes) will be a big problem.