Is Flood Risk Universally Sufficient to Offset the Strong Desire to Live Near the Water?

A number of hedonic property pricing studies of flood risk indicate that properties within a designated higher flood risk zone sell for a lower price than an equivalent property outside of it. However, often the homes most at flood risk are also the most desirable in terms of their proximity to the water, and this concurrent existence of positive water-related amenities and negative flood risk may be problematic to parse out in a hedonic estimation. Our hedonic property analysis approach in Galveston County, Texas aims at disentangling the countervailing impacts of flood risk and water-related amenities in a more systematic way by interacting distance to the nearest coastline and flood risk in order to account for these impacts acting together on housing sales prices in our coastal community. Further, we employ a more granular view of the flood risk split by varying flood risk return periods to allow for a more meaningful interaction between the negative and positive amenities related to proximity to the water. Results show that the hedonic price effect is dependent upon the distance to the nearest coastline, and as expected the distance effect varies by flood risk type. We find that in this coastal housing market properties located in the highest risk flood area, for up to nearly a quarter mile from the nearest coastline, actually command a price premium. A recent movement toward risk-based flood insurance premiums in the United States was deeply opposed by the real estate sector for fear of causing property values to steeply decline. This analysis sheds some further light on this depressed property value assertion highlighting its sensitivity to sufficient disentanglement of the coincident flood risk and water amenity effects.