Climate Adaptation and Policy-Induced Inflation of Coastal Property Value

Human population density in the coastal zone and potential impacts of climate change underscore a growing conflict between coastal development and an encroaching shoreline. Rising sea-levels and increased storminess threaten to accelerate coastal erosion, while growing demand for coastal real estate encourages more spending to hold back the sea in spite of the shrinking federal budget for beach nourishment. As climatic drivers and federal policies for beach nourishment change, the evolution of coastline mitigation and property values is uncertain. We develop an empirically grounded, stochastic dynamic model coupling coastal property markets and shoreline evolution, including beach nourishment, and show that a large share of coastal property value reflects capitalized erosion control. The model is parameterized for coastal properties and physical forcing in North Carolina, U.S.A. and we conduct sensitivity analyses using property values spanning a wide range of sandy coastlines along the U.S. East Coast. The model shows that a sudden removal of federal nourishment subsidies, as has been proposed, could trigger a dramatic downward adjustment in coastal real estate, analogous to the bursting of a bubble. We find that the policy-induced inflation of property value grows with increased erosion from sea level rise or increased storminess, but the effect of background erosion is larger due to human behavioral feedbacks. Our results suggest that if nourishment is not a long-run strategy to manage eroding coastlines, a gradual removal is more likely to smooth the transition to more climate-resilient coastal communities.