Myopia and Amnesia in Property Prices. Evidence from Two Floods

Rambaldi, Alicia N., Ganegodage, Kumudini R. and McAllister, Ryan R. (2017). Myopia and Amnesia in Property Prices. Evidence from Two Floods. In: 4th Conference of the Society for Economic Measurement. Society for Economic Measurement Annual Conference, Massachusetts Institute of Technology (MIT) campus in Cambridge, (). 26-28 July 2017.

Author Rambaldi, Alicia N.
Ganegodage, Kumudini R.
McAllister, Ryan R.
Title of paper Myopia and Amnesia in Property Prices. Evidence from Two Floods
Conference name Society for Economic Measurement Annual Conference
Conference location Massachusetts Institute of Technology (MIT) campus in Cambridge
Conference dates 26-28 July 2017
Proceedings title 4th Conference of the Society for Economic Measurement
Publisher Editorial Express
Publication Year 2017
Sub-type Fully published paper
Open Access Status Not yet assessed
Total pages 20
Language eng
Abstract/Summary We propose an approach to empirically implement the theoretical framework proposed by Pryce et al (2011) for analysing property prices’ responses to flood frequency and severity. Our study concentrates on the case of infrequent floods where myopic and amnesic perceptions of risk should dominate, and uses a natural experiment to empirically test Pryce et al (2011)’s theoretical pattern. In this regime observed quality adjusted prices are expected to drift away from a risk-adjusted constant quality property price towards the zero-risk constant quality property price as the years pass since the last flood. When a flood occurs, actors become aware of the true flood risk and observed prices quickly adjusts downwards towards the risk adjusted price. The city of Brisbane suffered two major devastating floods in 1974 and 2011. The construction of a dam with two compartments, flood and water reservoir, in the mid 1980s lead inhabitants and the market to underestimate the risk of another major event after that of 1974. The methodology proposed defines empirical estimates of zero-risk, risk-adjusted and actual quality adjusted prices which can be obtained using hedonic regressions and a difference-in-difference estimation. The test for amnesia and myopia is based on a block bootstrap approach. Our dataset covers property transactions for an inner Brisbane area located 5 km from Brisbane Central Business District(CBD) with 30% of each year’s sales being properties in the flood plain (defined by the 2011 flood) and with proximity to a waterway within the tidal reaches of the Brisbane River. While minor flooding directly impacts only very few properties, the visibility of swollen waterways can provide reminders of flood risk in between major events. This ideal setting allows us to test for myopic and amnesic behaviour for this area over the period 1990-2015. We find strong support for the behaviour.
Q-Index Code EX
Q-Index Status Provisional Code
Institutional Status UQ
Additional Notes

Document type: Conference Paper
Sub-type: Fully published paper
Collections: HERDC Pre-Audit
School of Economics Publications
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Created: Wed, 29 Nov 2017, 15:58:44 EST by Alicia N. Rambaldi on behalf of School of Economics