Seeing is Believing? Evidence from Property Prices in Inundated Areas

We use hedonic property models to estimate the changes in implicit flood risk premium following a large flood event. Previous studies have used flood hazard maps to proxy flood risk. In addition to knowing whether a property lies in the floodplain, we use a unique data set with the flood inundation map. We find that the price discount for properties in the inundated area is substantially larger than in comparable properties in the floodplain that did not get inundated. This suggests that, in addition to capturing an information effect, the larger discount in inundated properties reflects potential uninsurable flood damages, and supports a hypothesis that homeowners respond better to what they have visualized (“seeing is believing”).