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Abigail Ostriker

Anna Russo

September 8th, 2023

Floodplain rules push new houses to safer spots

0 comments | 6 shares

Estimated reading time: 5 minutes

Abigail Ostriker

Anna Russo

September 8th, 2023

Floodplain rules push new houses to safer spots

0 comments | 6 shares

Estimated reading time: 5 minutes

Flood-safety zoning is a common tool for protecting unsuspecting homebuyers from waterlogged floorboards. In the US, houses built in floodplains must be elevated and most homebuyers must purchase flood insurance. Abigail Ostriker and Anna Russo write that in addition to reducing damages for houses built on the riskiest land, these rules push out new construction to safer areas with less stringent regulation.


Abigail Ostriker will be presenting this work on Thursday, 14 September, at 10.00am

One year ago this month, Hurricane Ian struck the southeast United States, causing catastrophic damages estimated at USD$113 billion and becoming the third-costliest storm ever to strike the country. Part of the reason damages were so large is that cities in Ian’s path grew dramatically over the prior 40 years. As climate change exacerbates risks across the globe, developers increasingly face the choice of building in either safer or riskier areas — so how do we make sure they are choosing to build in the right places?

Answering this question is not as simple as prohibiting houses from any place with a significantly elevated risk of flooding, wildfires, or extreme heat. For starters, people have to live somewhere. Banning construction on large swaths of risky land might drive up the price of safe land so high that building in a floodplain would be cheaper, even after accounting for the cost of expected water incursions. Additionally, some risky places are in such desirable locations, whether due to their natural beauty, proximity to economic centres or cheap cost of living, that for some homebuyers, a house there could be worth the elevated risk.

However, it’s also possible that homebuyers will undervalue safety compared with other amenities, resulting in over-development in risky areas. In the context of flooding, a common government intervention addressing that risk is to create “flood zones” where special building codes and insurance rules apply. In the US, houses built in flood zones must be elevated and most homebuyers must purchase flood insurance. Do these regulations reduce flood risk in practice? In a recent working paper studying that question, we examine how those rules affect housing markets in Florida and find that flood zone rules reduced new development in floodplains by almost one fifth over the last 40 years.

To measure the effect of floodplain regulation on new construction, we had to address a range of potentially confounding factors. Floodplain regulation is likely correlated with other factors, such as local amenities, that also affect development. As a consequence, simply comparing new development in places that are or are not designated as a flood zone could attribute effects to regulation that are properly due to, for example, proximity to waterfronts. To deal with that concern, we focus on land in a small neighbourhood surrounding the historical boundaries of these flood zones. Because of the coarseness of historical mapping technology, land just inside or just outside the boundaries was very similar at the time the maps were drawn. However, in the modern day, land is significantly less likely to be developed just inside the flood zone. Therefore, we conclude that the flood zone designation itself shifted new construction from the regulated areas to unregulated alternative locations.

Does shifting housing out of flood zones actually reduce risk? This depends on both how well flood zone maps capture true risk and what alternative land is available. In Florida we find that the relocation of housing caused by the policy reduces the present discounted value of flood damages by about $1000 per newly developed house: a reduction of about 15 per cent. Of course, this isn’t the only benefit, since the policy also reduces the risk of houses that are still built in the flood zone. But the relocation benefit is an important component: we estimate that as much as one-quarter of the risk reduction from the flood-safety rules is due to building new houses in safer places.

While relocating new houses makes them safer, it may also introduce invisible costs. Perhaps homeowners would prefer to live in risky but otherwise-pleasant spots, even if they accounted for the full cost of doing so. What should governments do to make sure they do not distort housing markets in pursuit of safer living?

First, regulations should be well-targeted: environmental risk varies substantially across space, and technological advances are enabling ever-more granular maps of risk that can reveal differences even between neighbouring houses. In the US, flood maps are often out of date by many years and most fail to account for the changing risk profiles caused by climate change. Updating regulations to take advantage of the latest predictive technologies will help policymakers apply greater disincentives to live in the riskiest areas. This will prevent homeowners from being forced out of moderately risky areas where the benefit of building in a pleasant place more than compensates for the expected cost of flooding.

Second, discouragement from living in risky spots should be proportional to homebuyers’ mistakes or misaligned incentives. Evidence shows that informing searchers about flood risk reduces their interest in risky houses. Homebuyers may also buy riskier houses because they expect government assistance in case of a disaster. Better information could substitute for extra-high taxes in risky spots. On the flip side, commitments to public assistance ought to be paired with incentives for risk-reducing adaptations in advance of future flooding events.

Climate change is exacerbating environmental risk at the same time as our housing system is facing a supply crunch. New construction is sorely needed, but the durability of housing means that the choices we make today will impact the costs we face over the coming decades. We know that in the context of flooding, homebuyers struggle to incorporate flood risk into their purchase decisions. Our research suggests that zoning regulations can help, but must judiciously balance desirable local amenities against reductions in disaster risk.

 


  • This blog post is based on The Effects of Floodplain Regulation on Housing Markets, to be presented 14 September 2023 at LSE Environment Week.
  • The post represents the views of its authors, not the position of LSE Business Review or the London School of Economics.
  • Featured image provided by Shutterstock
  • When you leave a comment, you’re agreeing to our Comment Policy.

 

About the author

Abigail Ostriker

Abigail Ostriker is a postdoctoral fellow at the Harvard University Center for the Environment. She studies the economics of environmental risk, with a particular focus on adaptation to climate change

Anna Russo

Anna Russo is a PhD student at the Massachusetts Institute of Technology. Her research focuses on environmental and healthcare market design.

Posted In: Economics and Finance | Sustainability

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