Pricing climate risk: Are flooding and sea level rise risk capitalised in Australian residential property?

Abstract

This research tests if contemporary house prices reflect the flood vulnerability of properties. In particular, future sea level rise is likely to expose properties to flood risk that are currently considered safe from these adverse events. Using a comprehensive dataset comprising of statutory rating valuation information and sales transactions, a hedonic framework is applied to estimate the potential price effects of current flood risk and future sea level rise. A valuation discount effect is identified for properties in known flooded areas while sea level rise has no detectable effect on valuations or sales data. The lack of a sea level rise discount in this analysis may be due to the absence of clear and comprehensive information on sea level rise available to home purchasers, myopic buyer behaviour, relatively affordable insurance premiums in areas not yet affected and no concrete plans for requiring buyers and owners to contribute to community or dwelling adaptation costs. Our results also indicate that buildings are in a significantly worse state of maintenance and repair if they are located in both current flood zones and areas that are likely to be under water when sea levels rise further. Generally, the lack of a price discount highlights that purchasers may be under-prepared for the future challenges and implications of sea level rise and the ancillary effects of future flooding, inundation and storm surges.