Spatial Spillovers in the Pricing of Flood Risk: Insights from the Housing Market

Carolin Pommeranz and Bertram I. Steininger

Journal of Housing Research, 2020, vol. 29, issue S1, S54-S85

Abstract: We analyze how direct and indirect effects (spatial spillovers) matter when estimating price effects for a property located in a flood zone. Using a spatial Durbin error model, we show the importance of indirect effects which amount to -6.5% for houses and -4.8% for condominiums in the flood-prone city of Dresden (Germany). Direct effects diminish when controlling for spatial spillovers. Our results are generally robust across different model specifications, urban areas, and risk-adjusted prices that include insurance costs. Thus, ignoring indirect flood effects can lead to flood management that is inefficient and cost-ineffective, as the economic consequences are underestimated.

Date: 2020
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DOI: 10.1080/10527001.2020.1839336

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