Disaster on the horizon: The price effect of sea level rise. Journal of Financial Economics (forthcoming): 

Research Retrieved: September 2019
Retrieve the paper from the SSRN

The issue:

Financial researchers have long pondered the question of how markets price long-run uncertainties with regards to asset returns. This question becomes particularly pressing in the context of climate change, which scientists project will lead to rising sea levels of unknown magnitude and timing. Bernstein et al. (2019) study the pricing of long-term risks in this context, and investigate if real estate prices reflect future flood risk from sea-level rise.

Key findings:

  • Homes exposed to sea level rise sell for less: According to the study, buyers pay approximately 7% less for exposed properties compared to equivalent unexposed properties.
  • This price differential has grown over time: Lending support to the plausibility of this result, the difference in price has already been significant from 2007 to 2014, with significant growth seen in the last two years.
  • Climate awareness drives the effect: Moreover, the authors find that the price difference is driven by sophisticated buyers and communities worried about global warming. Interestingly, the risk of sea level rise at certain locations does not affect rents. This finding supports the idea that property quality does not confound the presented results.

Meaning for practice:

Central banks and financial regulators express concerns that climate change could endanger financial stability. If the risks associated with climate change are not accurately priced, there could be a wealth transfer between home owners, which could destabilize prices at large in the future. The results in this paper suggest that real estate pricing already reflects climate-related risk, but that the future pricing of coastal properties could nevertheless be facilitated by the disclosure of their exposure.