Flood Risk and Housing Prices – How Natural Hazard Impacts Property Markets

While properties face diverse risks from extreme weather events, flood depicts one of the most destructive natural forces, causing damages in the billion-dollar range every year. Property owners therefore may face the challenge of potential value losses or other down sides at the time of sale. Even tenants may be affected in terms of property damage if an extreme weather event occurs. The question arises whether these expected financial losses are actually reflected in market behavior. Therefore, this contribution discusses appropriate methodology and deploys Generalized Additive Models (GAMs) for estimating the impact of existing flood risk on property prices. Both rental as well as sales markets are investigated empirically, on the basis of approximately 16,000 observations from a local housing market in Germany. The study finds substantial evidence that market participants actually do incorporate potential damage from flood risk into their pricing consideration and behavioral patterns. The paper concludes with recommendations as how to transfer the methodology to African real estate markets and summarizes related data requirements, as utilized in the presented study and in preparation of a potential study on African commercial property or housing markets.