Natural Hazards and Housing Markets

Casualties and material losses caused by natural catastrophes are mainly driven by geographical patterns and residential choices. Environmental hazards impose a kind of easement to homes, so housing prices should reflect the different hazard levels. Nevertheless, this housing characteristic is random, so agents will make informed choices only if they have a correct perception of the risk. The hedonic price model in uncertainty predicts a price differential between at risk and not at risk homes equal to the expected damages plus a risk premium. The flood hazard discount price estimated on French data, compared to the average cost of flood natural catastrophe damages, suggests that housing market does not or barely capitalize natural hazards, except in the immediate aftermath of a major flooding. The Cat' Nat' insurance system, imperfect information, perception bias and memory effect are possible explanations.