Multiple hazards and residential rents in Switzerland: Who pays the price of extreme natural events?

Abstract

Natural hazard risk is captured in property prices through two principal channels: the risk to the building and the risk to its occupiers. These two effects are typically bundled up in transaction prices, thereby becoming individually unobservable. This study analyses residential rents as those should solely represent the risk to occupiers, who pay for their own losses in the case of a natural hazard event, but not for the owner's potential damage to the asset. Applying a hedonic framework to a sample of 18,339 dwellings across Switzerland, we examine the relationship between residential rents and exposure to five different climate-related natural hazards, some of which have been hitherto understudied. Strong evidence of a small rental discount of 1.4 % is found for dwellings that are subject to moderate flood hazard. Similar, albeit weaker, estimates are found for surface runoff hazard. Gravitational hazards including landslide, debris flow, and hillslope debris flow are not associated with significantly lower rents, possibly due to the small sample size. Our findings imply that not all natural hazard risk is reflected in the cost-side of the profit-equation in commercial residential real estate, but partly manifests itself in the form of reduced income, which is often less apparent.