The Capitalization of Geohazard Risks on Residential Real Estate: Applications to Lisbon, Portugal

VIII Conference of the Spanish-Portuguese Association of Natural Resource and Environment Economics, 2018

Franco, Sofia F., and Jacob L. Macdonald. (2018). "The Capitalization of Geohazard Risks on Residential Real Estate: Applications to Lisbon, Portugal" VIII Conference of the Spanish-Portuguese Association of Natural Resource and Environment Economics
https://editorialexpress.com/conference/AERNAVIII/program/AERNAVIII.html


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Abstract

This work considers the capitalization of urban hazard information via the residential real estate market of Lisbon, Portugal. We employ a spatial hedonic framework to estimate the impact of being located across areas in the municipality with a heterogeneity of urban flooding risks or seismic hazards. Special attention is given to the modifiable aerial unit problem and spatial influences in constructing measures or incorporating spatial considerations to the empirical estimation. We construct gridded spatial fixed effects which mitigate these biases and further employ a geographic regression discontinuity ensuring our results are not sensitive to underlying locational features.

Results indicate that the residential real estate market responds to hazard information with lower dwelling prices observed in areas with a high risk in the range of 2.3% for flooding risk and 1.1% for seismic risk. The largest response occurs due to urban flooding which is highly publicized and a relatively common occurrence for residents in comparison to seismic activity. Results suggest further that the combined effect of being subject to multiple hazards yield larger price reductions in the order of 2.8%, highlighting the importance of considering local contexts and interactive behaviour for policy discussion and mitigation planning. Flooding risk zones are heterogeneous in their impacts with ecological amenities such as parks or urban forests mitigating this negative impact while higher density areas compound the negative effect.