The Impact of Water front Locat ion on Res ident ia l Home Values Cons ider ing F lood Risks

K e y w o r d s Climate change; sea level rise; flood risks; housing prices With growing certainty over climate change impacts in the absence of coordinated mitigation, we investigate whether housing markets are adapting to these likely impacts. In 2018, the Intergovernmental Panel on Climate Change (IPCC), which collates global research, released a special report on the expected impacts of climate change associated with a global 1.58C temperature increase above preindustrial levels, an outcome the panel describes with high confidence as ‘‘likely’’ (Masson-Delmotte et al., 2018). Relevant to this study, the report describes ‘‘high confidence’’ global impacts, which include sea level rise, increases in mean temperature, and increases in ocean temperature, as well as ‘‘medium confidence’’ regional impacts including increased precipitation (storms). Additionally, the U.S. National Climate Assessment, released in November 2018 (U.S. Global Change Research Program, 2018), projects between $66 and $106 billion in losses directly related to flooding by 2050 and between $238 and $507 billion by 2100. These results will have a direct impact on the economy, with the report predicting a 10% decrease in GDP from climate change by 2100. The assessment suggests that actions being taken by cities, from installing pumps to preserving wetlands, are not expected to be nearly enough to counteract the I m p a c t o f W a t e r f r o n t L o c a t i o n u 8 5 J O S R E u V o l . 1 1 u 2 0 1 9 potential impacts of climate change and that stronger, unprecedented action needs to be taken within the next 12 years. In the context of increased certainty of sea level rise and disruptive regional weather events such as storms, do housing markets need to adjust for these negative expectations that are associated with proximity to water? In this paper, we examine the impact of water proximity on residential property values in three parts. In the first, we examine general premiums relative to the type of waterfront using a longitudinal and cross-sectional sample of property in markets across the United States, confirming and expanding the empirical evidence of water proximity on housing prices. This confirmation is useful to put the following case studies in context, and our large dataset offers a scale improvement on past market studies of waterfront value. In parts two and three, we focus specifically on known and future flood risk respectively to explore whether house prices reflect suggested negative effects of climate change. A growing literature describes these increased costs, notably damage caused by sea level rise and increased storm surge, directly affecting real estate markets (e.g., McAlpine and Porter, 2018). Water frontage has a strong positive influence on location value, but with expectations of a global 1.58C temperature increase, the question arises as to whether the negative influences of sea level rise and storm loss exposure offset the positive amenity value. Real estate markets characterized by long-lasting immobile assets are an excellent laboratory to explore whether markets are adapting to the increased certainty of climate change; prices today reflect longterm expectations of economic and consumption utility. Our findings reveal inconsistent evidence that housing markets are pricing climate change risk. Availability bias is prevalent; in markets hit by recent damage-causing storms, observed price discounts dissipate quickly. One potential reason discussed is whether insurance payouts mitigate the impact on value. We argue that federal flood insurance programs are underpriced and artificially prop up housing markets at higher risk of loss due to climate change. Only in extreme events large enough to displace employment, such as Hurricane Katrina in 2005, do we observe a longer-term depression of housing prices. u L i t e r a t u r e R e v i e w Our study contributes to two strands of research. First, it is well known that waterfront locations affect housing prices. We seek to ground our data in this literature and explore at greater scale whether the type of waterfront affects value since climate change is expected to affect ocean coastlines more than other types of waterfront. Second, exposure of housing markets to documented flood risk has been well studied and we use this literature to inform pricing models associated with climate change.