Does Climate Change Affect Real Estate Prices? Only If You Believe in it

51 Pages Posted: 11 Sep 2018

See all articles by Markus Baldauf

Markus Baldauf

University of British Columbia (UBC) - Division of Finance

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Constantine Yannelis

New York University Leonard N. Stern School of Business; University of Chicago Booth School of Business

Date Written: August 28, 2018

Abstract

Scientists agree that climate change will have a significant impact on U.S. coastal regions, yet beliefs among the general population on its occurrence and effects are divided. In this paper we study, both theoretically and empirically, whether real estate valuations reflect these differences in beliefs. We develop a model of housing choice in which agents derive utility from ownership in a neighborhood of similar agents. In equilibrium, agents endogenously sort by belief into geographically distinct neighborhoods. In our empirical analysis, we construct a comprehensive dataset on home transaction prices in the U.S. that maps individual homes to future inundation projections and survey data on beliefs of U.S. population about climate change. Our analysis shows that houses projected to be underwater in "believer" neighborhoods tend to sell at a discount compared to houses in "denier'' neighborhoods. This result is robust to a host of empirical specifications that account for variation in climate-change awareness over time, salience of flood risk, and house supply effects. Our results suggest that heterogeneity in beliefs about long-run climate change risks are reflected in U.S. real estate market prices.

Keywords: Heterogeneous beliefs, climate change, real estate prices

JEL Classification: E50, G40, G11

Suggested Citation

Baldauf, Markus and Garlappi, Lorenzo and Yannelis, Constantine, Does Climate Change Affect Real Estate Prices? Only If You Believe in it (August 28, 2018). Available at SSRN: https://ssrn.com/abstract=3240200 or http://dx.doi.org/10.2139/ssrn.3240200

Markus Baldauf (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Constantine Yannelis

New York University Leonard N. Stern School of Business ( email )

Suite 9-160
New York, NY
United States

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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