Academic journal article Journal of Risk and Insurance

Flood Hazards, Insurance Rates, and Amenities: Evidence from the Coastal Housing Market

Academic journal article Journal of Risk and Insurance

Flood Hazards, Insurance Rates, and Amenities: Evidence from the Coastal Housing Market

Article excerpt

ABSTRACT

This study employs the hedonic property price method to examine the effects of flood hazard on coastal property values. We utilize Geographic Information System data on National Flood Insurance Program flood zones and residential property sales from Carteret County, North Carolina. Our results indicate that location within a flood zone lowers property value. Price differentials for flood risk and the capitalized value of flood insurance premiums are roughly equivalent--both exhibiting a nonlinear relationship in flood probability. Our results support the conclusion that flood zone designation and insurance premiums convey risk information to potential buyers in the coastal housing market.

INTRODUCTION

Hedonic property models provide an intuitive analytical tool for examining the effects of housing attributes and spatially delineated characteristics on housing prices. Rosen (1974) formalized the relationship between the equilibrium price schedule, supplier technology, and household preferences in a competitive market. From the perspective of the household, marginal implicit prices can be interpreted as marginal willingness to pay for housing attributes. In their test of expected utility theory, Brookshire et al. (1985) were the first (to our knowledge) to consider spatially delineated risk factors in the context of the hedonic model, and relate these to household trade-offs. Their analysis suggests that California households are aware of spatial differences in earthquake risk, primarily due to special risk assessments conducted by government authorities in conjunction with disclosure requirements, and that the market capitalizes this risk, discounting properties in the high-risk area.

A number of hedonic property studies of hazards followed in the environment and risk literature, focusing on earthquake/volcanic hazards (Bernknopf, Brookshire, and Thayer, 1990; Beron et al., 1997), flood hazards (MacDonald, Murdoch, and White, 1987; MacDonald et al., 1990; Bin and Polasky, 2004), hurricane hazards (Hallstrom and Smith, 2005), hazardous waste and Superfund sites (Clark and Allison, 1999; Gayer, Hamilton, and Viscusi, 2000; McClusky and Rausser, 2001), erosion hazards (Kriesel, Randall, and Lichtkoppler, 1993; Landry, Keeler, and Kriesel, 2003), wind hazards (Simmons, Kruse, and Smith, 2002), and wildfire hazards (Donovan, Champ, and Butry, Forthcoming). Some of these articles make use of cross-sectional variation in risk-related attributes of properties to identify risk trade-offs (MacDonald, Murdoch, and White, 1987; MacDonald et al., 1990; Kriesel, Randall, and Lichtkoppler, 1993; Simmons, Kruse, and Smith, 2002; Landry, Keeler, and Kriesel, 2003), others make use of variation in government- or media-provided risk information over time (Brookshire et al., 1985; Bernknopf, Brookshire, and Thayer, 1990; Clark and Allison, 1999; Gayer, Hamilton, and Viscusi, 2000; McClusky and Rausser, 2001; Donovan, Champ, and Butry, Forthcoming), whereas still others utilize quasi-random, natural experiments to induce an exogenous change in risk information (Beron et al., 1997; Bin and Polasky, 2004; Hallstrom and Smith, 2005). (1)

It has recently been acknowledged that the level of risk associated with a property may be correlated with spatial disamenity levels. In their study of water pollution, Leggett and Bockstael (2000) note that pollution levels will tend to correlate with spatial disamenities, such as noise, odor, and unsightliness, associated with pollution emitters. As such, the effect of pollution may be overestimated unless other aesthetic disamenities are controlled. They use Euclidean distance from various emitters and proportional measures of surrounding land use to control for spatial disamenities. Their analysis takes advantage of an irregular coastline that creates considerable variation in pollution levels, breaking the correlation between pollution and emitter effects. …

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