The Effect of Insurance Premiums on the Housing Market and Climate Risk Expectations

Climate change threatens to worsen natural disasters and increase the cost of insuring against them. We study how insurance costs affect the housing market using a 2013 reform that raised flood insurance premiums for properties discontinuously around flood zone boundaries and construction year cutoffs. Using a triple-difference design, we find that treated homes experience a 2% relative decline in transaction prices. This effect is partly driven by increased expected risks triggered by higher premiums, rather than a pure cash-flow channel. The price effect is three times as large for homes exposed to long-term sea level rise, suggesting that insurance pricing can accelerate the incorporation of climate risk into asset markets. Higher premiums induce more rebuilding of treated homes, as well as reduce mortgage uptake as the required insurance becomes more costly.