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

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 floodprone 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 nonobvious 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.

Effects of Information on Risk Perception: Empirical Evidence from the Housing Market in Taiwan

“…Because some unobserved effects correlated with risk levels could create estimation bias, recent studies use panel data and apply the difference-in-differences method to compare price differentials before and after disclosure of risk information. Votsis and Perrels (2016) show that housing prices in flood-prone areas indicated by a flood-risk map drop significantly after the disclosure of the map. This suggests that people are usually not aware of, or underestimate the risk of, natural disasters before the release of risk information.…”

“…In the literature, information disclosure usually produces a persistent price differential for houses in risky areas, because people form new beliefs following the disclosure (Brookshire et al, 1985;Sanders, 2012;Hidano, Hoshino and Sugiura, 2015;Votsis and Perrels, 2016;Billings and Schnepel, 2017). However, given the existing risk information, some of the literature studies the effect of the occurrence of huge natural disasters on housing prices, both persistent and temporary effects can be found (Naoi, Seko and Sumita, 2009;Bin and Landry, 2013;Boes, Nüesch and Wüthrich, 2015;Gibbons et al, 2016;Tanaka and Zabel, 2018).…”

Risk Perception and Property Value: Evidence from Tianjin Port Explosion

“…As inspired by previous studies that used the indirect method to study risk perception [11,12,14,20,22,[24][25][26], we hypothesize that the property price reflects the demand for property and perceived risk. Since the demand for property is not significantly impacted by the port accident, the investigation of the impact of the Tianjin port explosion on the neighboring property prices will be conducted by adopting the difference-in-differences (DID) approach.…”

“…Indirect methods consider the consumers' decisions and preferences by the hedonic-price approach. The coefficients estimated in the hedonic-price approach indirectly reflect the buyers' marginal willingness to pay for the residential property in response to the specific external characteristics (or risk perception) [21,22]. In comparison with direct methods, indirect methods are less expensive and time-consuming to implement.…”

“…The findings indicate that home buyers were willing to pay for living in a region that boasted of a low flood risk. Similarly, Votsis and Perrels [22] investigated the relationship between flood risk information disclosure and property prices in three cities, namely Helsinki, Pori and Rovaniemi in Finland. They found that housing prices located in floodplains were detected to significantly drop after the flood risk information was disclosed.…”