Coastal Economics

Congratulations to Craig Landry and colleagues for their recent publication in Nature Communications. They developed a coupled human-natural systems, agent-based model to understand the influence of tax incentives, market dynamics, and coastal management subsidies on U.S. coastal property values, finding a damped response to coastal hazards that could be ameliorated through policy changes; such changes could hasten gentrification on the coast and affect the timing and market conditions of coastal retreat.

Research Synopsis:

Despite increasing risks from sea-level rise (SLR) and storms, coastal communities continue to attract wealthier residents, and coastal property values continue to rise. These trends seem paradoxical. If inundation is inevitable in the long run, why do high prices for coastal real estate persist with increasingly wealthier owners? It appears as if people are racing to get in the way of climate change. This behavior is consistent with empirical findings that property prices do not fully reflect the risks from SLR and flooding.

To understand underlying mechanisms driving these empirical phenomena and forecast coastal community dynamics in response to SLR progresses, Landry and colleagues model how real estate markets interact with the physical coastal system over a long (150-year) time horizon. They develop the Coastal Home Ownership Model (C-HOM) to link real estate markets, coastal amenities, coastal hazards, and policies that respond to coastal change by combining elements from analytical models, numerical models, and empirical studies in economics, finance, nonlinear systems, and coastal processes.

“The major benefit of this approach is that we can explore how natural and market forces coalesce in complex ways, resulting in sometimes surprising patterns over time; we can make plausible estimates about when conditions on the coast might change, and assess how the trajectory responds to aspects of public policy – like subsidies for beach nourishment or provision of flood insurance”, said Prof. Landry.

Model simulations reveal three mechanisms that contribute to the persistence of high property values in coastal areas vulnerable to SLR. First, high-income owners are tax-advantaged over low-income owners and institutional investors because higher marginal tax rates increase the benefits of the mortgage deduction. The implicit subsidy drives agents to bid up desirable real estate. Because people with higher income also have a higher willingness to pay for coastal amenities, this mechanism puts short-run upward pressure on coastal property values regardless of the expected long-run future state of the system. Second, tax policy works in concert with outside housing markets. If coastal prices adjust downward, high-income agents enter the market to exploit arbitrage opportunities within the broader market for desirable real estate. This props up prices, and the entry of wealthy agents dampen the climate signal. Third, policies that artificially increase the value of property delay the downward adjustment of prices in response to SLR. Although nourishment often passes a benefit-cost test, previous studies do not consider the effects of nourishment subsidies on stimulating housing demand in areas vulnerable to SLR. Subsidies also delay associated demographic shifts; less subsidization accelerates coastal gentrification but permits greater capitalization of flood risk in property values. Thus, removing subsidies for beach management can improve market efficiency (in that prices reflect risk), but can impede equity (in that lower income households are pushed out). This finding raises questions about whether public funds could be spent in some other way to support equity that does not distort coastal property markets.