Sea level rise, coastal flooding, and house prices

In my ECONS102 class last week, one of the things we discussed was hedonic pricing - the idea that the price of some goods (such as houses or land) reflects the sum of the values of all of the characteristics of the good. In the case of property, if the property includes a dwelling, the price will reflect the quality and size of the dwelling, number of bedrooms, bathrooms, whether it has off-street parking, and so on. But the price also reflects the access of the property to local amenities, such as good schools, public transport, and so on (for example, see this post from 2017), as well as the property's risks of damage due to environmental disasters such as earthquakes or floods.

In the case of risk, properties that have a higher risk profile should have lower prices - a higher risk profile is a negative characteristic for a property. Two new research articles provide some relevant evidence.

First, this article by Allan Beltran, David Maddison, and Robert Elliott (all University of Birmingham) published in the Journal of Environmental Economics and Management (sorry I don't see an ungated version), looked at the impact of floods on property prices in the UK. They used data on over 12 million property transactions and nearly 5 million properties over the period from 1995 to 2014. Interestingly, their method looked at 'repeat sales'. That means that they essentially looked at property's prices before, and after, a flood event. Some properties were directly affected by flooding, while others weren't. They found that:

...in the immediate aftermath of inland flooding the average price of property in a postcode entirely inundated is 24.9% lower. For incidents of coastal flooding the corresponding figure is 21.1%. These results moreover emerge from a comparison of inundated and non-inundated properties all within the floodplain. Such discounts are however short-lived; property affected by inland flooding typically recovers after 5 years and in just 4 years for coastal properties. The time for price recovery differs markedly for properties in different price-quartiles. For properties affected by coastal flooding in the highest price-quartile, the property price discount disappears after only 1 year whereas for properties in the lowest price-quartile the discount remains statistically significant for up to 6-7 years.

So, floods reduced house prices, but the prices rebounded so that there was no net negative effect within several years. Interestingly, the effect was slightly lower for coastal flooding, and disappeared quicker. That is, people were quick to return to demanding coastal property soon after coastal flooding. That should be a bit of a worry to us, given that sea level rise is likely to be one of the enduring effects of future climate change.

Which brings me to the second article, by Asaf Bernstein (University of Colorado at Boulder), Matthew Gustafson (Pennsylvania State University), and Ryan Lewis (University of Colorado at Boulder), published in the Journal of Financial Economics (ungated earlier version here). This article provides more direct evidence on the effect of sea level rise on house prices, using data from over 460,000 property transactions of properties in the US that would "be inundated following a 1-6 foot increase in average global ocean level". Their analysis is not based on repeat sales, and neither is it based on actual sea level rise (it is projected future sea level rise). The latter point means that, if there are negative impacts on property prices, then buyers are factoring in future sea level rise in their decisions about buying. They find that:

...SLR exposed properties trade at a 6.6% discount relative to comparable unexposed properties. We further break this into exposure buckets, with properties that will be inundated after one foot of global average SLR trading at a 14.7% discount, properties inundated with 2-3 feet of SLR trading at a 13.8% discount, and properties inundated with 4-5 and six feet of SLR trading at 7.8% and 4.4% discounts, respectively.

Interestingly, it is non-owner-occupiers would are more likely to apply a discount to the property:

We find that the SLR exposure discount is concentrated in the non-owner occupied segment of the market. On average, exposed non-owner occupied properties trade at a 10% discount, relative to comparable non-exposed proper- ties, while exposed and unexposed owner occupied properties trade at similar prices.

In other words, owner-occupiers likely underestimate the negative impacts of sea level rise on their homes. They also found that owner-occupiers with stronger beliefs regarding climate change did apply a discount in buying coastal property.

These two papers, taken together at face value, should probably worry anyone who is concerned about the future impact of sea level rise and coastal flooding on people living near the coast. Coastal property is at risk in many (perhaps most) areas. Holding all other factors constant (such as the quality of housing, access to amenities and services, etc.), the value of these properties should be decreasing relative to less vulnerable property (or at least, not rising as quickly). It appears that is not the case, and in fact following flood events (which should make it abundantly clear to potential purchasers that these properties are vulnerable to coastal flooding and sea level rise), property prices are rebounding quickly to their previous levels. On top of that, it appears that it is owner-occupiers (and in particular climate-change-naive owner-occupiers) who will face the brunt of these future impacts.

I don't know that this leads to a strong case for regulation of coastal property in some way, but at least it suggests that coastal property owners (and potential buyers of coastal property) must become better informed about the risks. The specific vulnerability of coastal property to inundation and flood events probably needs to be communicated to potential buyers for every coastal property transaction.