Housing Prices and the Public Disclosure of Flood Risk: A Difference-in-Differences Analysis in Finland

Athanasios Votsis, Adriaan Perrels

Research output: Contribution to journalArticleAcademicpeer-review

17 Citations (Scopus)

Abstract

Information gaps and asymmetries are common in the housing market and this is frequently the case with the risks of natural processes, especially in coastal areas where the amenity dimension may dominate the risk aspect. Flood risk disclosure through maps is a policy instrument aimed at addressing this situation. We assess its effectiveness by identifying whether such maps induce a price differential for single family coastal dwellings in three Finnish cities, and by estimating the discount per square meter for various flooding probabilities (return times). The estimations indicate a significant price drop after the information disclosure for properties located in flood-prone areas as indicated by the maps. In the case of sea flooding information in Helsinki, the price effect is sensitive to the communicated probability of flooding. Overall, the discussed policy instrument appears to have functioned as intended, correcting information gaps and asymmetries related to flood risk. The identified effect is spatially selective; it caused a short-term localized shock in market prices in conjunction with some reorientation of demand from risky coastal properties towards ones that represent a similar level of coastal amenity, but are less risky in terms of flooding. This hints at the potential for incorporating the shocks associated with flood events or risk information into broader-scoped urban modelling and simulation. Similarly, the reasonable accuracy with which the housing market processes the additional information shows a potential for wider use of the disclosure of non-obvious risks in real estate markets. In the case of adapting to climate change risks, additional uncertainties may make the disclosure instrument less effective, if used as a single tool.
Original languageEnglish
Pages (from-to)450-471
JournalJournal of Real Estate Finance and Economics
Volume53
DOIs
Publication statusPublished - 2015
Externally publishedYes

Keywords

  • flood risks
  • housing market
  • information effect
  • information gaps

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