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That Sinking Feeling: The Changing Price of Disaster Risk Following an Earthquake

Author

Listed:
  • Levente Timar

    () (Motu Economic and Public Policy Research and GNS Science)

  • Arthur Grimes

    () (Motu Economic and Public Policy Research and University of Auckland)

  • Richard Fabling

    () (Motu Economic and Public Policy Research)

Abstract

We treat the Canterbury (Christchurch) earthquake sequence as a potential source of new risk information to home buyers in New Zealand. We compare pre- and post-earthquake sales of properties in two other urban areas of the country (one with high and one with low seismicity) to estimate how the pricing of earthquake-related risks changed following the Canterbury earthquakes. Specifically, we test for changes in risk premia associated with soil liquefaction potential, previously a largely ignored hazard, and changes in premia for house construction types (such as brick) that previously were well-known to be less safe in an earthquake. By exploiting two types of risk (one previously ignored and one well-recognised by households) across two areas with differing seismic risks, pre- and post-earthquake, we use a difference-in-difference-in-difference approach to test hypotheses about how people respond to a new clearly defined risk that is important only in certain circumstances. We find no evidence that the price of known construction risk changed in either seismic area and no evidence of a change in the price of liquefaction risk in the low seismic area following the Canterbury earthquakes. However, we do find strong evidence that a liquefaction risk discount emerged in the high seismic area immediately after the Canterbury earthquakes. These findings are all in accord with rational responses to risk following the earthquakes. However, the liquefaction risk discount in the high seismic area dissipated after two years and had disappeared entirely within three years of the earthquakes. This finding is similar to those identified in a limited number of previous empirical studies on responses to natural hazard events. While we cannot rule out entirely that this time-varying risk premium is a rational response to risk (e.g. because of changing expectations around insurable versus non-insurable risks), we find it more plausible that these changing risk discounts reflect behavioural responses to risk as indicated in the cognitive dissonance literature.

Suggested Citation

  • Levente Timar & Arthur Grimes & Richard Fabling, 2014. "That Sinking Feeling: The Changing Price of Disaster Risk Following an Earthquake," Working Papers 14_13, Motu Economic and Public Policy Research.
  • Handle: RePEc:mtu:wpaper:14_13
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    References listed on IDEAS

    as
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    Cited by:

    1. Olga Filippova & Cuong Nguyen & Ilan Noy & Michael Rehm, 2020. "Who Cares? Future Sea Level Rise and House Prices," Land Economics, University of Wisconsin Press, vol. 96(2), pages 207-224.
    2. Kirdan Lees, 2019. "Quantifying the costs of land use regulation: evidence from New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 53(3), pages 245-269, September.
    3. Levente Timar & Arthur Grimes & Richard Fabling, 2015. "Before a Fall: Impacts of Earthquake Regulation and Building Codes on the Commercial Building Market," Working Papers 15_19, Motu Economic and Public Policy Research.
    4. Levente Timar & Arthur Grimes & Richard Fabling, 2018. "Before a Fall: Impacts of Earthquake Regulation on Commercial Buildings," Economics of Disasters and Climate Change, Springer, vol. 2(1), pages 73-90, April.

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    More about this item

    Keywords

    Property values; earthquake risk; cognitive dissonance; hedonic model; repeat sales model;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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