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Is climate change being priced into coastal real estate? Depends if you are buying from a believer or not

Many believe climate change will affect economies and societies across the planet, and there are already signs that concerns are working their way into certain real estate prices.

Recently published research in the journal The Review of Regional Studies revealed that dwellings facing the highest risk of flooding from a rise in sea levels sell for a discount relative to risk-free properties.

Authors Jason Beck and Meimei Lin analyzed sales of 42,000 single-family homes in Savannah, Georgia, for the period covering 2007 to 2016. Using data from the National Oceanic and Atmospheric Administration, the authors categorized vulnerability to inundation for each dwelling. The flooding risk was deemed the highest for properties expected to be inundated with a one-foot rise in sea level. The lowest risk was assigned to properties only likely to flood for a six-foot increase in sea level.

For Savannah, properties susceptible to flooding for an increase in sea level of three feet or less sold at a 3.1 per cent discount relative to dwellings deemed not at risk. Houses exposed to flooding for a rise in sea-level between three and six feet, however, did not report a discount relative to the risk-free properties.

When the authors divided the study into two distinct periods, they observed that the discount due to climate change was higher for the more recent period. This suggest that with the passage of time, risk awareness increased, and the effect of potential flooding risk grew over time.

The results come with one puzzle. Waterfront properties in many coastal regions across the globe continue to sell for a premium. If the risk of flooding posed by climate change is real, do property values reflect such risks?

A soon-to-be-published paper in the journal Review of Financial Studies offers some clues to the problem. Markus Baldauf of the University of British Columbia and others analyzed millions of residential transactions in the United States to determine the impact of future flooding vulnerability on transaction prices.

They also controlled for climate-change related beliefs at the local level by categorizing counties as “believers” and “deniers” using beliefs data from Yale Program on climate change. The Yale Climate Survey posed the question: Do you think that global warming is happening?

The answer was tabulated as the share of respondents in a county who answered yes. The authors characterized counties as “believers” if the share of those who answered yes was greater than the median value for the overall response. The “denier” counties were those who responded yes were less than the overall median response.

The authors quite interestingly found that “homes located in climate change ‘denier’ neighbourhoods sell for about seven per cent more than homes in ‘believer’ neighbourhoods.” Using the median priced house as an example, the authors demonstrated that if such a house was “relocated” from a denier county to a believer county, its value would decrease by approximately $26,220, which accounted for 13.8 per cent of the median price of $190,000.

It is not evident from the paper if the believers were overreacting to climate change risks or the deniers were in denial, the difference in valuation, though, was found to be statistically significant.

Research on housing in Helsinki, Finland, showed that when flood risks were disclosed to residents in the form of high-resolution flood maps, a statistically significant price drop was observed for coastal properties with greater probability of flooding.

The Finnish study, published in the Journal of Real Estate Finance and Economics in 2016, showed that in addition to the price drop, some demand for housing shifted from coastal dwellings with an elevated risk of flooding to places with similar coastal amenities, but a lower risk of flooding.

The review of research presented above allows us to draw some conclusions. Waterfront properties in coastal regions continue to be in high demand and sell at a premium. Coastal properties, though, can be categorized based on flooding risk due to global warming or other factors.

Empirical research has demonstrated that properties less or unlikely to be flooded in the future sell at a premium. However, as the flooding risk elevates, coastal properties experience a discount in property values.

Still, a drop in values is more pronounced in areas inhabited by those who believe in climate change. In counties where climate change deniers are in majority, the expected drop in valuation is lower.

Thus, the answer to the question of whether global warming affects housing prices depends at least in part on who you’re asking.
 

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