Analysis: research has found that house buyers would expect a discount of around 31% for properties at risk of flooding

Would you be willing to buy a house with a 1% chance of flooding per year? What about a house with a 0.1% chance, or a 10% chance? And what kind of discount would you expect on the price for those properties relative to similar houses with no risk of flooding?

Economists like me are interested in the answers to these questions for two reasons. The first is that the answers help us to understand how people perceive flood risk. This tells us something about the true welfare costs of flooding, which might be very different to the financial costs. The latter are typically assessed by looking at the value of insured losses or government payouts to victims. However, these do not account for some important, but difficult to measure, impacts of flooding such as stress, disruption to everyday lives, and emotional impacts of your home being flooded, in some cases repeatedly.

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From RTÉ Nine News, a report on the clean-up operation in Kenmare after flooding in July 2020

The second reason is that housing markets and how they function are a crucial factor in determining exposure to flood risk, and the future costs of flooding. Housing markets suffer from a number of problems that ultimately result in over-exposure to flood risk. Among these is the problem of path dependency, or the locking-in of exposure to risk based on the historical development of flood prone areas near rivers and coasts. In many settings, the public also lacks good information about flood risk because scientific assessments have not been carried out, or because risk maps are outdated or only reflect historical risk.

Then, there is the thorny issue of moral hazard. This is where our individual behaviour does not fully reflect the risks that we face, because we are somehow (at least partially) shielded from the consequences of those risks. In the case of flooding, this might be because governments typically fund flood defence schemes and disaster recovery for those affected.

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From RTÉ One's Prime Time, a report on the fairness of flood insurance 

Add to that the threat of increased flood risk, as seas rise and rainfall events become more intense as a result of climate change, and we are facing a future of bigger floods, affecting more households, with substantially higher costs. These problems all contribute to the large and growing costs of flooding that we observe today.

In recent research, Tom Gillespie, Ronan Lyons and myself conducted an analysis of housing prices in Ireland. We found that the release of new information about flood risk has led to the emergence, for the first time, of an observable price signal on flood risk in the Irish housing market. Our best estimate is a flood discount of 3.1% for properties with at least a 1% chance of flooding per year.

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From RTÉ Archives, RTÉ News report from 1965 on Athlone families marooned by floods

This discount is not observed prior to the release of the new risk information, for dwellings defended by flood relief schemes, or for rental dwellings. Our analysis also shows that flood risk is borne unequally in the Irish housing market – the discount for lower value dwellings is around 6-7%, while for dwellings at the top end of the market, there is no discernible flood discount.

We also carried out a survey of public attitudes to flood risk, which finds that the general public in Ireland is concerned about flooding. These concerns have increased for many over the last 10 years, and a large majority of people expect the problem to get worse in the coming decades. Our survey also asked about the appropriate price discount for dwellings at risk of flooding. The results indicate an average flood discount of around 31%, an order of magnitude larger than our best estimate based on the analysis of housing prices.

From RTÉ News, report on 'unprecedented' flooding in Clifden after torrential rain in September 2020

What explains this large gap between the two estimates? The larger discount emerging from our survey might partly reflect the nature of the methodology, for example in relation to salience of flood risk, since the survey question prompts respondents to think about flooding, or "talk is cheap" criticisms of responses to hypothetical questions. But it could also be that the full welfare costs of flooding are still not reflected in Irish housing prices. In particular, there is suggestive evidence in our data that people are implicitly attaching a much higher probability to flood risk than the scientifically assessed level of risk – particularly for areas assessed as being at low (but non-zero) risk of flooding.

On the one hand, this over-weighting of the risk, particularly for lower risk areas, may reflect problems with risk information and its communication to the public. It is a well-established finding in behavioural economics that people tend to give too much weight to low probability outcomes.

Most people in our survey expect the risk of flooding to increase in the coming decades

But the results might also partly reflect a conscious choice by respondents to treat the scientific assessments as underestimates of the true risk. This interpretation is supported by the fact that most people in our survey expect the risk of flooding to increase in the coming decades.

A better understanding of how people process risk information in relation to flooding, and how they perceive and value those risks, represents an important topic for future research in this area. It will also be a crucial input to policy across a range of important areas including flood risk management, insurance and flood defences, as well as for informing projections of future flood losses in a world of increasing flood risk.


The views expressed here are those of the author and do not represent or reflect the views of RTÉ