The Effect of Flood Risk on Residential Land Prices

Abstract

Floods are one of the most frequent natural disasters today. Hence, it is highly important to explore the effect of flood risk on residential land prices to promote the rational allocation of land resources and incorporate climate change risk control into territorial spatial planning. This paper takes the primary urban area of Hangzhou as an example, based upon data from 424 residential land plots. With spatial autocorrelation analysis and the Spatial Durbin Model (SDM) approach, the spatial effect of flood risk on residential transaction land price was investigated. The results show that, ceteris paribus, plots with high risk of flooding suffer a price discount of 8.62%. The unique mechanism of the way flood risk affects land prices was discussed further from the perspectives of land ownership and land price systems in China. Furthermore, when the land price in surrounding areas increases one percent, the land price in the area will increase 14.32%. The spatial spillover effects of land price were analyzed with the flood information disclosure system and the stakeholders’ considerations in land price comparison. The effect of flooding on residential land prices in Hangzhou is the result of government regulations and market allocations, which are fundamentally different from those of the free market allocations in many western countries. Interestingly, the risk of flooding is capitalized into the price, whether it is determined by government or market pricing. Integrating flood risk into land price determination can help promote the optimal allocation of land resources and minimize depreciation attributable to flood disasters.