Spatial Spillovers in the Pricing of Flood Risk: Insights from the Housing Market

46 Pages Posted: 23 Mar 2016 Last revised: 24 Mar 2018

See all articles by Carolin Pommeranz

Carolin Pommeranz

RWTH Aachen University

Bertram I. Steininger

Royal Institute of Technology (KTH)

Date Written: March 21, 2018

Abstract

In this study, we analyse how, and to what extent, direct and indirect effects (spatial spillovers) matter when estimating price effects for a property location in a flood zone. Unlike the previous literature, we show the importance of indirect effects resulting from a neighbourhood being situated in a flood zone. Additionally, the type of indirect effects (global vs. local) needs to be determined theoretically or empirically using an appropriate spatial model comparison approach. Using the Bayesian model comparison for data related to the flood-prone city of Dresden, Germany, we find strong evidence for a spatial Durbin error model which controls for local spillover effects. These indirect price effects amount to -6.5% for houses and -4.8% for condominiums. However, direct effects diminish when controlling for spatial spillovers. Our results are mostly robust across different model specifications and risk-adjusted prices that include future insurance costs, thus providing evidence of the importance of addressing indirect effects in the form of local spillovers in the analysis of flood zone effects. Ignoring indirect flood effects when formulating policy can lead to flood management that is inefficient and not cost-effective, as the economic consequences of flood are underestimated.

Keywords: spatial econometrics, spatial spillovers, indirect effects, flood hazards, housing market

JEL Classification: R2, C2, G22, Q51, Q54

Suggested Citation

Pommeranz, Carolin and Steininger, Bertram I., Spatial Spillovers in the Pricing of Flood Risk: Insights from the Housing Market (March 21, 2018). Available at SSRN: https://ssrn.com/abstract=2753305 or http://dx.doi.org/10.2139/ssrn.2753305

Carolin Pommeranz (Contact Author)

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

Bertram I. Steininger

Royal Institute of Technology (KTH) ( email )

Stockholm
Sweden

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