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The behaviour of property prices when affected by infrequent floods

Author

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  • Fletcher, Cameron S.
  • Ganegodage, K. Renuka
  • Hildenbrand, Marian D.
  • Rambaldi, Alicia N.

Abstract

The reduction in property values following a major flood event is significant to individuals, communities and governments alike. Property owners who purchase properties just before a major flood risk significant personal loss on their largest single asset. The costs of a major event are shared across communities through government funded recovery efforts in the short term, and changes to insurance premiums and house values in the long term. Designing protections, adaptations and insurance mechanisms that can equitably ameliorate future impacts requires a detailed understanding of how flood risk affects property prices. This paper explores patterns of discounting of property prices following infrequent flooding events. It relates property value discounting in response to floods to various theories of market behaviour. There are alternative behavioural theories which explain why agents may react in this manner. We use a behavioural framework proposed in earlier literature to construct econometric measurements that provide the opportunity to make statistical inferences on whether the expected behaviours are supported by the data. The patterns found are consistent with a market where buyers are either unaware of the risk of flood or unable to evaluate it probabilistically.

Suggested Citation

  • Fletcher, Cameron S. & Ganegodage, K. Renuka & Hildenbrand, Marian D. & Rambaldi, Alicia N., 2022. "The behaviour of property prices when affected by infrequent floods," Land Use Policy, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:lauspo:v:122:y:2022:i:c:s0264837722004057
    DOI: 10.1016/j.landusepol.2022.106378
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk-adjusted housing prices; Constant quality prices; Amnesia and myopia; Unawareness; Quasi-experimental evidence;
    All these keywords.

    JEL classification:

    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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