The effect of information about climate risk on property values

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.