Redrawing of a Housing Market: Insurance Payouts and Housing Market Recovery in the Wake of the Christchurch Earthquake of 2011

34 Pages Posted: 25 Sep 2020

See all articles by Cuong Nguyen

Cuong Nguyen

Victoria University of Wellington - School of Economics and Finance

Ilan Noy

Victoria University of Wellington

Dag Einar Sommervoll

affiliation not provided to SSRN

Fang Yao

Bank of Ireland

Date Written: 2020

Abstract

On the 22nd of February 2011, much of the residential housing stock in the city of Christchurch, New Zealand, was damaged by an unusually destructive earthquake. Almost all of the houses were insured. We ask whether insurance was able to mitigate the damage adequately, or whether the damage from the earthquake, and the associated insurance payments, led to a spatial reordering of the housing market in the city. We find a negative correlation between insurance payouts and house prices at the local level. We also uncover evidence that suggests that the mechanism behind this result is that in some cases houses were not fixed (i.e., owners having pocketed the payments) - indeed, insurance claims that were actively repaired (rather than paid directly) did not lead to any relative deterioration in prices. We use a genetic machine-learning algorithm which aims to improve on a standard hedonic model, and identify the dynamics of the housing market in the city, and three data sets: All housing market transactions, all earthquake insurance claims submitted to the public insurer, and all of the local authority’s building-consents data. Our results are important not only because the utility of catastrophe insurance is often questioned, but also because understanding what happens to property markets after disasters should be part of the overall assessment of the impact of the disaster itself. Without a quantification of these impacts, it is difficult to design policies that will optimally try to prevent or ameliorate disaster impacts.

Keywords: house price prediction, machine learning, genetic algorithm, spatial aggregation

JEL Classification: G220, Q540, R110, R310

Suggested Citation

Nguyen, Cuong and Noy, Ilan and Sommervoll, Dag Einar and Yao, Fang, Redrawing of a Housing Market: Insurance Payouts and Housing Market Recovery in the Wake of the Christchurch Earthquake of 2011 (2020). CESifo Working Paper No. 8560, Available at SSRN: https://ssrn.com/abstract=3699240

Cuong Nguyen (Contact Author)

Victoria University of Wellington - School of Economics and Finance ( email )

PO Box 600
Wellington, 6140
New Zealand

Ilan Noy

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Dag Einar Sommervoll

affiliation not provided to SSRN

No Address Available

Fang Yao

Bank of Ireland ( email )

Ireland

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