Does Climate Change Affect Real Estate Prices?
Only if you believe in it, according to Markus Baldauf, Lorenzo Garlappi, and Constantine Yannelis, who employ a comprehensive dataset combining scientific forecasts on sea levels, beliefs about climate change risks, and data on more than ten million home transactions to conclude that:
- Homes projected to be underwater due to rising sea levels sell at a discount in neighbourhoods where residents believe in climate change, compared to those neighbourhoods with a higher proportion of climate change deniers.
- A 1-standard-deviation increase in the percentage of climate change believers above the national mean is associated with a roughly 7% decrease in house prices for homes projected to be underwater.
- This valuation gap suggests that asset prices reflect physical risks, beliefs about those risks, and societal perceptions.
- This study has some limitations, including its reliance on the correlation between beliefs and house prices not fully capturing causality, a focus on U.S. data, and no distinction between the effects of climate change and that of climate change policies.
The authors underscore the role of heterogeneity in beliefs about long-run climate change risks in shaping real estate prices, which is crucial for risk assessment and investment decisions.
Policymakers can draw on these findings to inform climate change communication strategies in policy development, an area largely ignored despite the significant economic implications.