Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?
AbstractHow will climate risk beliefs affect coastal housing market dynamics? This paper
provides both theoretical and empirical evidence: First, we build a dynamic housing
market model with heterogeneity in home types, consumer preferences, and flood risk
beliefs. The model incorporates a Bayesian learning mechanism allowing agents to
update their beliefs depending on whether flood events occur. Second, to quantify these
elements, we implement a door-to-door survey campaign in Rhode Island. The results
confirm significant heterogeneity in flood risk beliefs, and that selection into coastal
homes is driven by both lower risk perceptions and higher coastal amenity values.
Third, we calibrate the model to simulate coastal home price trajectories given a future
flood risk increase and policy reform across different belief scenarios. Accounting for
heterogeneity increases the projected home price declines due to sea level rise by a
factor of four and increases market volatility by an order of magnitude. Studies
assuming homogeneous rational expectations may thus substantially underestimate the
home price implications of future climate risks. We conclude by highlighting potential
implications for welfare and flood policy.