Property Market Valuation of Flood Risk When Insurance is Free

Abstract

I study the effect of perceived flood risk on property prices in Sweden, before and after a major flood event. Data on property transactions for single-family homes are used in a difference-in-differences spatial hedonic model to study the pre- and post-flood risk discount. I find no significant price discount for the properties in the floodplain, neither before nor after the flood. This stands in contrast to findings from other countries, where prices have been found to drop significantly after a major flood. An explanatory mechanism driving the difference could be the home insurance system of Sweden, where insurance against flood damages is included free of charge, in contrast to countries investigated in previous studies.