CLIMATE RISK

climate.pdf
Abstract: The durability of the real estate capital stock could hinder climate change adaptation because past construction in beautiful but increasingly risky coastal areas anchors the population. But, coastal developers anticipate that their asset also faces more risk and this creates an incentive to seek adaptation strategies ranging from; self protection, to reducing capital durability to seeking an exit option. The option value offered by short lived capital is greater if the volatility of local shocks increases over time. Climate change is likely to increase such volatility. Building on past work that has studied the consequences of persistent local labor demand declines, this paper studies how persistent local new climate risks impact the real estate investor's joint decision of locational choice, capital durability and maintenance.
Abstract: In the typical asset market, an asset featuring uninsurable idiosyncratic risk must offer a higher rate of return to compensate risk-averse investors. A home offers a standard asset's risk and return opportunities, but it also bundles access to its city's amenities|and to its climate risks. As climate change research reveals the true nature of these risks, how does the equilibrium real estate pricing gradient change when households can sort into different cities? When the population is homogeneous, the real estate pricing gradient instantly reflects the "new news". With population heterogeneity, an event study research design will underestimate the valuation of climate risk for households in low-risk cities while overestimating the valuation of households in high-risk areas.
climate_nber.pdf