The Costs of Hedging Disaster Risk and Home Prices in the Face of Climate Change

Abstract

Climate change threatens to increase the damages of natural disasters and the cost of insuring against them. We study how the cost of hedging disaster risk changes home prices by using a 2012 law that mandated flood insurance premium increases for properties discontinuously around flood zone boundaries and based on the timing of construction. With a triple-difference design, we find that homes that experience the largest increase in premiums experience the largest decline in home values. Evidence suggests that the effect is partly driven by increases in perceived risks triggered by increases in premiums. While the effect on home prices is unrelated to current hazard risk, the estimate is three times larger for homes that are exposed to long-term sea level rise than those not exposed, suggesting that insurance pricing can accelerate the incorporation of climate risk in asset markets. Buyers of these homes also reduce the probability of taking out mortgages, as insurance is required for mortgages.

Keywords: Flood insurance, real estate, climate change, mortgage

JEL Classification: G1, G14, Q54, G28, G22