Is Flood Risk Capitalised Into Property Values?

Abstract

Economic theory suggests that, other things being equal, properties located within a floodplain should suffer a price discount. A survey of the existing evidence nonetheless reveals that this price discount lies anywhere between −75.5% to a +61.0% price premium. In this paper we summarise and explore the wide variation in the results to obtain ‘best’ estimates with which to guide policy. Results from our meta-analysis comprising 37 published works and 364 point estimates indicate marked differences between studies according to when and where they were conducted. For coastal regions the results show that properties located in the floodplain command higher prices; this finding is however likely to be caused by a high correlation between omitted coastal amenities and flood risk. There is moreover, evidence that publication bias affects the coastal flooding literature. Results from meta-regression analyses intended to uncover sources of heterogeneity confirm that controlling for time elapsed since the most recent flood is especially important. For inland flooding the price discount associated with location in the 100-year floodplain is −4.6%. Although other estimates are defensible, we suggest this figure be used as a rule of thumb to determine the benefits of flood relief projects to households.