Effect of flooding on residential real estate market prices: the case of Pärnu city in Estonia

The changes in market price levels of residential real estate market may occur due to several reasons. Those reasons may have either positive or negative influence, causing either the rise or fall in the level of real estate market prices. Sometimes it may happen that the same real estate asset may be affected by several different factors at the same time, which normally, in ceteris paribus condition, have detrimental effect on the market price level, but bundled together, may cause a co-effect in a manner, where the overall influence on the direction of the level of real estate market price is difficult to identify.One of those hardly identifiable co-effects may occur, if to put together sharp changes in the real estate market conditions with the sharp and detrimental changes in the environmental conditions. Changes in real estate market conditions are measured mostly by the changes in macro- and microeconomic indices, such as changes in economic growth, inflation rate, general and bank loan interest rates and demographics, as well as certain specific physical and market features of the certain types of real estate assets. On the other hand, the possible detrimental environmental conditions might be evoked by different weather events, like heavy wind, causing a storm, hurricane, tornado, and tsunami, also snow, droughts, frosts, heavy rainfall, and lightning, but also by fire, flooding, earthquake, avalanches, tidal waves, and landslides. Usually, several of those mentioned environmental events occur also in a bundle, either at the same time or in a particular sequence in a certain time-frame. This study aims to explore both short- and long-term effects of one-time major flooding incident on residential real estate market prices in the city of Pärnu, in Estonia. The studied marine-coastal flooding event was induced by a heavy storm, caused by the hurricane called “Erwin/Gudrun” at the 9th of January, 2005. The authors offer their own holistic theoretical framework, elaborated further from Tobin and Newton (1986) theory, explaining the phenomenon of flooding on real estate market prices. In the empirical part, the authors seek for alternative solutions to mainstream quantitative methods in similar studies, like repeat sales and hedonic regression analysis, to find robust evidences for identifying the effect of flooding on residential real estate market prices in terms of a small sample analysis of flooded versus non-flooded area transactions data.