The effect of information about climate risk on property values

Abstract

Significance Understanding whether markets efficiently price environmental risk is critical to policy design, particularly as key climate risks change rapidly. We conduct a nationwide analysis of the extent to which the US housing market prices information about flood risk contained in publicly available flood maps. Using data on millions of home sales, we find that information in these maps is not fully capitalized in property values. Lack of information appears to contribute to underpricing: More sophisticated commercial buyers and more risk-aware buyers respond more to floodplain information. This underpricing increases incentives to develop in hazardous places. Enhanced communication of flood risk could help ensure such risk is appropriately reflected in market outcomes.