Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?
How do climate risk beliefs affect coastal housing markets? This paper provides theoretical and empirical evidence. First, we build a dynamic housing market model and show that belief heterogeneity can reconcile the mixed empirical evidence on flood risk capitalization into housing prices. Second, we implement a field survey in Rhode Island. We find significant heterogeneity and sorting based on flood risk perceptions and amenity values. Third, we calibrate the model and estimate that coastal prices currently exceed fundamentals by 10%. Ignoring heterogeneity leads to a four-fold underestimate of future coastal home price declines due to sea level rise.
Summaries
- Rhode Islanders who live on the coast are less concerned about the risk of flooding than their inland neighbors. How are the...
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