The Rising Cost of Climate Change on Home Values

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By Justin Tyndall

Climate change poses a clear threat to coastal real estate assets. As sea level rises and coastal weather events become more severe, exposed properties will experience recurring damage and some will become uninhabitable. Homebuyers may fail to fully appreciate the threat of sea level rise, causing homes in coastal areas to be overpriced. However, there is a growing body of evidence that US homebuyers are starting to take the real estate impacts of future sea level rise seriously.

In a recently published paper, I bring some new data to this question by estimating the effect of sea level and climate risk exposure on the value of residential properties on Long Island in New York State. A significant share of property on Long Island is threatened by sea level rise. Among residential properties transacted between 2000 and 2017, 11% were within 3 meters of sea level, and 7% were within just 2 meters.

Property transactions in Long Island

Using a complete record of property transactions, I compare the price appreciation of properties exposed to sea level rise to those that are not. In my analysis, I focus on properties that sold multiple times over the 2000-2017 study period, allowing me to fully control for property characteristics.

I find that properties that are within a few meters of current sea level or are located in a floodplain, had significantly lower price appreciation. Properties that were between zero and two meters from current sea level had annual appreciation that was 1.3 percentage points less than the local average. In a market where real price growth averaged 0.5% annually, this represents a significant divergence in the value of homes based on their exposure to climate risk.

The results also provide some interesting evidence on how demand shifted within the market for coastal real estate. I found that homes near the coast, but at relatively high elevation, performed better than the overall market. Homebuyers interested in coastal real estate shifted their demand from high-risk to low-risk properties, pushing up the price of lower-risk coastal homes.

Figure 2: Annual appreciation of home values by distance above sea level

As the consequences of climate change become more certain and less distant into the future, the impact on real estate markets will accelerate. A significant share of properties in Hawai’i are exposed to sea level rise and coastal erosion. A steady decline in the value of high-risk real estate helps to soften the risk of sudden, calamitous losses for coastal property owners. Nonetheless, the future consequences of climate change represent an enormous financial loss to real estate markets and a reorientation of how coastal property is developed and managed.

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The full text of the article can be found here: https://uhero.hawaii.edu/sea-level-rise-and-home-prices-evidence-from-long-island/

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