The Effects of Flood Risk Mandatory Disclosure on Housing Markets

Abstract

Disclosing flood risk during real estate transactions is implemented broadly to address market failures associated with asymmetric information. We examine the effects of the flood risk mandatory disclosure policy on housing markets in Japan. Our empirical study focuses on Osaka, a large metropolitan area that has not experienced any catastrophic floods in recent years, making it an ideal setting to identify the stark effects of the policy legislation. We find evidence that the policy negatively affects properties' transaction prices in high-risk areas with deep expected inundation depths, but has an insignificant effect in low-risk areas. Our findings emphasize the importance of disclosure policies to ensure that transaction prices adequately reflect flood risks.

Keywords: Climate Change, Information Disclosure, Flood Risk, Real Estate Markets

JEL Classification: D82, Q54, R30