Welfare Effects and the Immaterial Costs of Coastal Flooding

A flood can be a severe event, causing not only material damage but also immaterial, such as stress and discomfort. Yet, the risk of flooding may not always be known to house buyers before purchase. In this paper, we estimate the immaterial cost of flood risk from coastal flooding using the hedonic house price approach. The analysis is based on a rich house price dataset that identifies flooded houses using insurance data. The design of the insurance mechanism makes it possible to separate material and immaterial damage as all houses are insured independently of the flood risk. Applying a difference-in-differences design, we study the effect of changes in flood risk information, namely the publication of flood maps, and a flood event in Denmark in 2013. By estimating a time-variant house price function, we can infer the welfare implications of non-marginal changes in flood-risk perception. We find that households have a maximum WTP of 21% of the house price to avoid being flooded after a flood event and that this effect diminishes over time. Houses located in a flood risk zone are sold with an 8.4% price discount but controlling for inundation removes the impact of the flood map.