Implications of Rising Flood Risk for Residential Real Estate Prices and the Location of Employment

A GMM Spatial Model with Agglomeration and Endogenous House Price Effects

Working Paper 2012:01

Authors: Yu Chen, Bernie Fingleton, Gwilym Pryce, Albert Chen and Slobodan Djordjević 

While there is a relatively small literature on the impact of flood events on employment at regional and national level, the effect of flood risk on employment density at the local level, and the link to housing prices are largely neglected. This paper attempts to fill these gaps and extend the literature in four ways. First, we argue that competition for land between firms and households will generate a potentially endogenous role for house prices, which we estimate using a GMM two-stage least squares spatial econometric model. Second, we model interaction effects between agglomeration and flood risk using a gravity-based measure of agglomeration. Third, our models utilise a high-resolution flood risk measure which incorporates both flood frequency and severity. Fourth, we use a high-resolution measure of employment to capture local effects of flood risk.