The effect of information about climate risk on property values

TLDR

Floods and other climate hazards threaten housing worldwide, and while reflecting climate risk in prices could curb risky development, it is unclear how much markets price these risks. The study measures the effect of flood‑risk information in regulatory floodplain maps on residential property values in the United States. It employs multiple empirical methods and two decades of nationwide home sales data to assess flood‑risk pricing. The price penalty is larger for commercial buyers and in risk‑aware markets, and overall flood‑zone homes are overvalued by $43.8 billion (95% CI $32.6–$55.6 billion), raising concerns about market stability as climate risks intensify.

Abstract

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.