Blooming algae and falling returns on investments. The Swedish housing market in the face of biodiversity risk

This study aims to shed light on the implications of biodiversity risk for the Swedish residential housing market. While most of the previous academic literature and national and international financial supervision focused on transition and physical risks as the main channels of climate’s impact on housing prices, this study reveals the significant role that biodiversity risk can play. In Sweden, higher temperatures, discharges of nutrients from agricultural activities and changing raining patterns have rendered algae blooms a frequent presence in the country’s lakes, streams and seashores. By adopting a repeat-sales approach over the housing transactions that occurred in the country between 2005 and 2021, it is found that each additional appearance of blooming algae reduced returns on investments by 0.5% on average. Additional identification strategies confirm that the marginal impact of one additional blooming alga has a very small impact, while the first appearance can reduce the return on investment by about 5.5% on average. The results are robust to several forms of sensitivity analysis, such as including information on housing renovation and excluding assets with short holding periods. Concerns over measurement errors and endogeneity of the distribution of the algae are addressed with the use of instrumental variables (IVs), which confirm the validity of the findings and reveal an even stronger impact. The results of this study are relevant for a large number of economic actors, among these private households, investors and policymakers, and present alternative channels, other than natural hazards, through which climate change can impact housing markets.