“Seeing is Believing? Property Prices in Inundated Areas”–a new brief from the Wharton Risk Center

Jun 23, 2015 | News & Views, What's New

Conclusions of the brief from the Wharton Risk Center:

“Our findings suggest that buyers of floodplain properties have a limited awareness about flood
hazards, despite the federal requirement for flood insurance for floodplain properties with a
federally-backed mortgage. Our results suggest that it is the result of being flooded, rather than
knowing there is a potential to be flooded, that affects property prices (seeing is believing).

“If there were an information effect associated with being located in the floodplain, one would
expect to see a price reduction for non-inundated floodplain properties as well, but our results
suggest that this is not the case. We did not find any price reduction for the floodplain properties
when we dropped the inundated properties from the model. The non-inundated properties,
including those in the floodplain, did not significantly reduce in value following the flood. In
inundated areas, the price reductions vanished after about six years.

“These results offer important lessons for public risk communication. Flood risk, for instance, is
often communicated using the probabilities of occurrence. However, this might not be sufficient
warning for individuals who have never directly been affected by flooding to cause them
to behave proactively for their protection against flood risk. Therefore, future public risk
communication strategies should explicitly address those individuals who have not personally
experienced a flood.”