Asymmetric Information Provision and Flood Risk Salience

Abstract

Physical climate risk increasingly affects real estate markets, but most evidence is focused on large-scale climate shocks such as hurricanes and subsequent flooding events. This paper examines the impact of information provision on the capitalization of forward-looking flood risk in the housing market. We exploit a climate risk disclosure program and subsequent flooding event in the Netherlands, using a difference-indifference framework. The results show that ex-ante, flood risk is not reflected into real estate prices – housing prices in areas without dike protection, and thus at higher risk of flooding, are 6.5% to 10.2% higher on average. This amenity premium remains after 2010, the start of a period when annual letters were sent to residents living in unprotected areas, but decreases after a small-scale flood event occurred in the highrisk zone, leading to a decline in house prices by 3.4% in 2013. This price effect seems transitory, dissipating quickly, and is only observed among buyers who also received the letter. We also observe an increase in the time-on-market and listing-to-sales price ratio among local buyers. In addition to the housing market outcomes, we provide evidence of residents’ adaptive behavior. The renter-occupied ratio increases with the flood risk information exposure, suggesting that homeowners opt to rent out their properties in response to flood risks. We also find that, compared to the pre-letter period, smaller-sized, higher-educated, and more risk-averse families tend to relocate from the high-risk area. The results in this paper provide insight for policy makers grappling with how to reduce information asymmetry in housing markets in the face of increasing climate risks.

Keywords: Flood risk, information asymmetry, housing prices, climate adaptation, migration

JEL Classification: Q54, R30, R23, D10