Typhoon Hagibis: Land prices fall beyond floodplains
A Bank of Japan working paper examines how flood-risk perception influences land prices after Typhoon Hagibis (2019). It finds prices in inundated areas declined 10% over five years, with spillover effects extending 800 meters beyond flood boundaries.
Beyond the water's edge
The study empirically investigates the impact of Typhoon Hagibis (2019) on land prices, focusing on spatio-temporal dynamics using parcel-level data and inundation maps.
Key findings show that land prices in directly inundated areas declined monotonically by 10% over five years.
Significant negative spillover effects were observed, with non-inundated plots within 100 meters of the flood boundary decreasing by 5%, while effects dissipated beyond 800 meters.
Price declines also differed inside and outside official hazard zones, with larger spillover effects in unaffected areas outside these zones, particularly in residential areas.
The authors note that these changes capture shifts in market participants' subjective perceptions of future flood risk and economic activity, rather than physical damage to buildings.
Risk perception and spatial decay
To rationalize the empirical patterns, the paper extends the Bakkensen and Barrage (2022) sorting model by endogenizing belief formation through adaptive learning and allowing information signal strength to vary with locational attributes.
Simulations identify three essential mechanisms: temporal frictions in information dissemination, spatial frictions in information diffusion, and pre-flood risk capitalization via hazard map designations.
Temporal frictions explain the gradual, multi-year price decline, while spatial frictions govern the localized, geographically decaying impacts.
The role of prior capitalization is evident from heterogeneous responses across hazard zones, with larger spillovers observed outside zones suggesting lower ex-ante risk pricing.
Bridging theory and reality
This study provides granular empirical evidence on climate-related financial risks, moving beyond direct damage to quantify broader economic spillovers.
Its integration of a theoretical framework with real-world data offers a robust model for understanding how risk perceptions evolve and impact asset values.
This approach is vital for policymakers and financial institutions to develop more accurate risk assessments and climate adaptation strategies.