Quantifying changes in risk perception through house price differentials following the catastrophic Canterbury earthquake event

Abstract

Abstract Studies of risk perception across multiple disciplines conclude similar findings, one of which is that the perceived risk of extreme and rare events, such as earthquakes, is underestimated before the event and overestimated after the event occurs. This paper examines whether this change in risk perception is detected in price differentials for housing. A Difference-in-Difference (DID) model is used to model the events utilizing control and treatment variables to estimate price determinants. The findings indicate that after the 22 February 2011 Canterbury earthquake consumers’ are paying premiums of 15.1, 18.8 and 16.1% to live on no risk, low risk and medium risk land, respectively, compared to high risk zoned land. This supports the hypothesis that consumers’ perception of risk became more acute after experiencing an extreme event. Risk premiums associated with safer land zones are not evident in the coefficients for control variables implying there was no accounting for land risk before the earthquakes.