The information on flood risks leads to corrections in house prices in Finland

According to a recently published analysis, carried out in the Finnish Meteorological Institute (FMI), the publication of flood risk maps has caused a correction in the house prices in and near the flood prone areas.

Incited both by the EU Flood Directive and by the first Finnish National Adaptation Plan, detailed flood risk maps have been published from 2007 onwards by the Finnish Environment Institute (SYKE) for areas prone to coastal or fluvial flooding. FMI's study assessed effects in Helsinki, Espoo, Pori and Rovaniemi by analysing prices both before and after the publication of these maps, covering the period 2006-2010.

The researchers were in particular interested in the information effect of the maps. For houses subject to flood risk prices rose less than the average for each studied city, whereas for comparable houses just outside the flood risk zones prices rose more than the average for each studied city.

The correction means that – by and large – the prices now better reflect the damage risk for houses in flood risk zones. Similar nearby houses without flood risks, but otherwise with the same amenities (such as open water views), apparently earned a premium thanks to the risk free amenities.

A large GIS dataset was created counting altogether 340 000 house transactions. The data contain not only information about the houses and their location, but also detailed information about flood risks, micro climate, and the environment. Different features influence prices to varying degrees, whereas the strengths of these influences vary over time. Thanks to the size and richness of the dataset the information effect of the flood risk maps could be separated from other effects on the house prices by applying an econometric model.

In Pori and Rovaniemi the risk concerns river flooding, while it is mainly coastal flooding in the Helsinki Metropolitan area. Yet, for the risk response behaviour the physical source of the flooding does not seem to be important. It is the understanding of the expected damage that counts. Some buyers and sellers may not even know that the price deviation is caused by the flood risk, but in the market process prices of comparable neighbouring houses simply have a lot of effect on price formation of nearby houses.

"All in all the analysis shows that markets can be very effective conveyors of information, but may need some help to get the information above the table, such as in the form of public flood risk maps", researchers Athanasios Votsis and Adriaan Perrels state.

Yet, for awareness raising authorities should not only trust the effects of the market mechanism, but also apply dedicated campaigns, researchers underline. Nevertheless, information guidance could be explored more in policies where the relevant prices are subject to many factors.

The underlying study for this article was funded by the Finnish Academy programme FICCA through the RECAST project and by the Helsinki University Centre for Environment (HENVI) through the ENSURE project.

Further information

Researcher Athanasios Votsis, FMI, athanasios.votsis@fmi.fiResearch Professor Adriaan Perrels, FMI, adriaan.perrels@fmi.fi, tel. +358 50 583 8575

Athanasios Votsis & Adriaan Perrels: Housing Prices and the Public Disclosure of Flood Risk: A Difference-in-Differences Analysis in Finland. Journal of Real Estate Finance and Economics, article on line 28.8.2015, DOI 10.1007/s11146-015-9530-3 http://link.springer.com/article/10.1007/s11146-015-9530-3