Disaster on the Horizon: The Price Effect of Sea Level Rise

Citation: Asaf Bernstein, Matthew Gustafson, Ryan Lewis (2017/12/02) Disaster on the Horizon: The Price Effect of Sea Level Rise.
Internet Archive Scholar (search for fulltext): Disaster on the Horizon: The Price Effect of Sea Level Rise
Download: https://ssrn.com/abstract=3073842
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Summary

Otherwise similar properties with greater exposure to sea level rise:

• Rent is unaffected
• Sale price discounted 7%, 10% considering only non-owner occupied properties
• Discount increases with exposure: "ocean encroachment after 1 foot of global average sea level rise trading at a 22%, 2-3 feet at a 17% discount, 4-5 feet at a 9% discount and 6 feet at a 6% discount."
• Non-owner occupied (investment) discount unaffected by local climate change belief
• Owner-occupied discount affected by local climate change belief: in areas with 90% worried about climate change, owner-occupied discount similar to investment discount, in areas less worried about climate change, owner-occupiers discount exposure less
• Discount increased over 2007 (no difference between exposed and unexposed properties) to 2016 (13.5% discount for non-owner occupied)
• Difference-in-difference analysis starting from 2010 finds non-owner occupied discount increased from 8% to 14% following 2014 release of IPCC report

Data from NOAA, Zillow, Trulia (rental), and Yale Climate Opinion Maps.

Provides evidence that "uncertain but predictable long horizon cash flow shocks are priced by market participants" lacking in previous finance literature

Theoretical and Practical Relevance

"Using the long run discount rate provided by Giglio et al. (2014)and assuming complete loss at the onset of inundation, we estimate that markets expect 1 foot of sea level rise within 35 years, 2-3 feet within 45 years, 4-5 feet after 65 years, and 6 feet in 80 years. These results are consistent with the medium to high projections provided in Parris et al. (2012) and utilized by the NOAA in their 2012 report."

"[D]iscounts lowest among less sophisticated buyers, where housing constitutes plurality of savings, and regions that don't believe in climate change...raises possibility of large wealth shocks to coastal communities."