That Sinking Feeling: The Changing Price of Disaster Risk Following an Earthquake

Abstract

We treat the Canterbury (Christchurch) earthquake sequence as a potential source of new risk information to home buyers in New Zealand. We compare pre-and post-earthquake sales of properties in two other urban areas of the country (one with high and one with low seismicity) to estimate how the pricing of earthquake-related risks changed following the Canterbury earthquakes. Specifically, we test for changes in risk premia associated with soil liquefaction potential, previously a largely ignored hazard, and changes in premia for house construction types (such as brick) that previously were well-known to be less safe in an earthquake. By exploiting two types of risk (one previously ignored and one well-recognised by households) across two areas with differing seismic risks, pre-and post-earthquake, we use a difference-indifference indifference approach to test hypotheses about how people respond to a new clearly defined risk that is important only in certain circumstances. We find no evidence that the price of known construction risk changed in either seismic area and no evidence of a change in the price of liquefaction risk in the low seismic area following the Canterbury earthquakes. However, we do find strong evidence that a liquefaction risk discount emerged in the high seismic area immediately after the Canterbury earthquakes. These findings are all in accord with rational responses to risk following the earthquakes. However, the liquefaction risk discount in the high seismic area dissipated after two years and had disappeared entirely within three years of the earthquakes. This finding is similar to those identified in a limited number of previous empirical studies on responses to natural hazard events. While we cannot rule out entirely that this time-varying risk premium is a rational response to risk (e.g. because of changing expectations around insurable versus noninsurable risks), we find it more plausible that these changing risk discounts reflect behavioural responses to risk as indicated in the cognitive dissonance literature.

Possible effects of potential lahars from Cotopaxi volcano on housing market prices

“…Further studies of housing prices in relation and proximity to natural hazards followed (MacDonald et al 1987(MacDonald et al , 1990Bin and Polasky 2004;Troy and Romm 2004;Samarasinghe and Sharp 2010;Pryce et al 2011;Egbenta et al 2015;De Koning et al 2016). Such studies included the analysis of the effects of flooding in communities around the USA and beyond (De Koning et al 2016;MacDonald et al 1990), the effects of hurricanes in coastal areas (Hallstrom and Smith 2005), the effects of erosion in rural and coastal communities (Kriesel et al 1993;Landry et al 2003), the effects of wildfires and forest fires (Donovan et al 2007;Rossi 2014;Kiel and Matheson 2015) and the effects of earthquakes as well as volcanic activity (Bernknopf et al 1990;Murdoch et al 1993;Beron et al 1997;Timar et al 2014). All of these studies show that house prices decreased with increasing exposure to natural hazards.…”