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

Abstract

This paper studies whether house prices reflect belief differences about climate change. We show that in an equilibrium model of housing choice in which agents derive utility from ownership in a neighborhood of similar agents, prices exhibit different elasticities to climate risk. We use comprehensive transaction data to relate prices to inundation projections of individual homes and measures of beliefs about climate change. We find that houses projected to be underwater in believer neighborhoods sell at a discount compared to houses in denier neighborhoods. Our results suggest that house prices reflect heterogeneity in beliefs about long-run climate change risks.

Keywords: Heterogeneous beliefs, climate change, real estate prices

JEL Classification: E50, G40, G11