Rics Flooding Values

FINDINGS IN BUILT AND RURAL ENVIRONMENTS

JUNE 2009

FiBRESERIES

Research

Key findings

WHAT IS THE IMPACT OF FLOODING ON PROPERTY VALUES? SOME EVIDENCE FROM THE UK Jessica Lamond, University of Wolverhampton, UK

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The evidence indicates that flooding has only a temporary impact on property values, and after three years prices had returned to their normal market level.

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Flood events in low risk areas had no impact on property prices.

•

Being designated at high risk of flooding has had no effect on property values in areas with no flood events.

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Insurance remains available to

householders, with flood risk not being the major factor in determining levels of premiums.

•

At point of purchase, there was not a high level of awareness among homeowners as to the flood risk of their property, and this is particularly true among longer-term homeowners.

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The fact that flooding does not have a major impact does suggest that current insurance and risk disclosure regimes may not be encouraging

behaviour which reduces the danger of damage from flooding.

IMPACT OF FLOODING ON PROPERTY VALUES

Background When a property is waist deep in raw sewage it certainly doesn’t look like an estate agent’s dream and you might be forgiven for thinking the investment is being literally washed away. However, when the media circus has left town and the white vans have gone home what really happens to the value of property at risk of flooding?

A team of researchers led by Dr Jessica Lamond from the Property and Surveying Research Unit at the University of Wolverhampton has addressed this question in a unique way by using real transaction data and comparing house prices before and after flooding. The research revealed that for many towns that suffered in the 2000 flood event the prices of homes in the floodplain grew at the same rate as the surrounding areas. For the small minority of locations where a price dip was observed the effect was temporary; prices recovered within three years at the most, often more quickly.

Not only did the research suggest that flood events have a temporary effect, there was no measurable impact of floodplain risk designation or of insurance availability on property prices. In fact the results of a questionnaire of householders showed that, despite all the negative media attention, most respondents are insured against flooding, the majority having had no problems with their insurance, and that insurance problems did not hinder property sales.

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Introduction We are becoming accustomed to seeing pictures of flooding in the media. The floods of summer 2007 are probably most readily brought to mind as they were devastating in their extent, caused deaths, and brought widespread chaos to infrastructure up and down the country. Other recent events include the Carlisle flood in 2005, the dramatic flash flooding in Boscastle in 2004 and the highest river floods in a generation in autumn 2000. These UK flood events appear to be a part of a worldwide pattern of more frequent and larger scale flood events which experts attribute to climate change. Climate scientists predict that the inevitable consequence of changing weather patterns will be that we can expect more floods in the future.

Floods cause great damage to built and natural environments, the cost of emergency measures, cleaning up and subsequent restoration runs into billions of pounds. The human costs are also high for those whose homes have been flooded. Not only do they face months of disruption and potentially financial loss but also loss of treasured and often irreplacable possessions. After their homes have been restored worries remain for the flooded householder: some describe the anxiety they experience each time it rains; others worry about getting insurance and what happens next time it floods. Underlying this is the general perception that their home will be worth less or be difficult to sell.

The concerns of property owners about the value of their property on the floodplain have also been affected by insurance and risk designation changes over the past eight years: In the aftermath of the 2000 flood insurers revised their policy on cover for floodplain properties and some residents experienced problems with renewing their policies; Risk designation for floodplain properties became more readily available with the launch of internet maps of flood risk bandings made available by the Environment Agency in 2004. Many commentators anticipated that a collapse in the price of floodplain property could result from these improvements in risk disclosure.

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Home owners are not alone in their concern about property value. Mortgage lenders and valuation professionals need to have a view about the value of property at risk in order to protect their investments and advise their clients. However, while it might seem obvious that floodplain property should be worth less than property not at risk, there is no guidance available regarding what constitutes floodplain property and what scale of discount should be expected.

When the evidence is examined it becomes far less certain that floodplain property will sell at a discount. Price theory predicts that buyers will discount for flood risk if they are aware of it, but in the UK many floodplain residents purchase their property in ignorance or partial ignorance of flood risk, because flood risk information is not a standard element of property searches. The results from empirical studies are not conclusive either, international studies do not agree on the existence or scale of any impact. UK studies have, in the past, been based on surveys of expert opinion and have shown that there is a wide variation in the views of professional valuers.

This study is the first in the UK to use actual transaction data, and complements previous studies by estimating the impact of flooding on the price of transacted property.

IMPACT OF FLOODING ON PROPERTY VALUES

Details of the work While previous studies were inconclusive in determining the nature and scale of flood impacts on property value they did agree on some features. These lessons were important in designing the transactional study, namely that: • The impact of a flood on property price can be very different between different flood locations depending on local factors such as the expected return period.

• The impact of flood events on property value declines as time elapses from the flood.

• Positive impacts of floodplain location such as river and coastal views can offset the negative impacts of flood risk.

• The cost and availability of insurance is an important consideration in valuing floodplain property.

The first lesson led to the choice of a research design which looked at the effect of flood for multiple flood locations. Coupled with information regarding flood history and flood risk it allowed comparison of flood status with measured impact. Lessons two and three led to the choice of a repeat sales formulation, a method which examines the growth between pairs of sales of the same property. As location does not change between sales, the repeat sales formulation simplifies the isolation of effects due to flooding.

The research concentrated on thirteen locations flooded or narrowly avoiding flooding in the 2000 event. Locations were chosen to be spread widely across the country and to have variety in flood history and risk. An additional requirement was a lower limit of 100 flooded properties at the location. Table 1 shows the spread of the case study locations from North to South England and from East England to Wales and the range of flood histories.

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Details of the work Table 1: Locations selected for empirical analysis

Location

Role of Defences

Source

Number Flooded/ Protected

Region

Malton/ Norton

No protection

Main river

Flooded

169

North East

Woking

No protection

Main river

Flooded

100

Thames

Shrewsbury

No protection

Main river

Flooded

230

Midlands

Bewdley

No protection

Main river

Flooded

140

Midlands

Barlby

Overtopped defences

Main river

Flooded

152

North East

Lewes

Overtopped defences

Main river

Flooded

800

Southern

Hatton

Overtopped defences

Main river

Flooded

142

Midlands

Ruthin

Ordinary watercourse

Non main river

Flooded

250

Wales

Mold

Ordinary watercourse

Non main river

Flooded

181

Wales

Newport

Ordinary watercourse

Non main river

Flooded

130

Wales

Southsea

Surface water

Non main river

Flooded

200

Southern

West Bridgford

Not flooded

Not flooded

Not flooded

9700

North East

Wakefield

Not flooded

Not flooded

Not flooded

1150

North East

Transaction data was taken from the Land Registry Price Paid data set. Every transaction within selected postcodes over the period 2000 to 2006 was collected and repeat sales pairs determined from the address details. Postcodes were selected from all Environment Agency risk categories, “significant”, “moderate”, and “low” and a control group of nearby property outside the floodplain. The flood designation for each property was extracted from the Environment Agency website and flood history determined from multiple sources including flooding literature, news reports and Environment Agency flood event outline maps. The price growth index of floodplain property was compared with the control group property, testing for significant differences via a Chow test. The repeat sales formulation used in this study also looked for impacts which changed over time by testing for differences in indices for every year.

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Flood Status

The cost and availability of insurance was examined via a questionnaire survey of floodplain residents in 5 of the same locations. A census sample of addresses within selected postcodes was taken, resulting in over 400 completed questionnaires. The survey provided property details, flood history, claims information and insurance premium cost. It also explored the problems experienced in obtaining insurance and the strategies employed to overcome them. By merging the two datasets from the price and insurance analyses a unique combination of transaction and insurance data was thus available for a small sample of properties in the floodplain. This sample was subjected to analysis of variance and a truncated hedonic model in order to measure the contribution of insurance to any measured price effect.

IMPACT OF FLOODING ON PROPERTY VALUES

If the formula for price of house i at time period t is a variant of the explicit time variable hedonic model J

Ln Pit = ∑ βj lnXjit - γZit + ct + εiτ j=1

where βj = a vector of coefficients representing the elasticity of price with respect to the matrix of locational and property specific explanatory variables, Xjit.

Zit is the flood status variable at time t with coefficient -γ (0 if not previously flooded 1 if previously flooded) εiτ, the error term is distributed mean 0 and variance σe2 ct a generalised logarithmic market growth term.

The explicit time variable adaptation of the standard cross-sectional hedonic model combines the data for adjacent time periods and then includes time as an independent variable. It is generally used to generate a price index where ct is estimated from known prices and property characteristics.

Then the growth in price of property i between time t and t+k is given by J

J

j=1

j=1

Ln Pit+ik - Ln Pit = ∑ βj lnXjit+k - ∑ βj lnXjit - γZit+k + γZit + ct+k - ct + εiτ Property factors such as size and age of house are assumed not to change significantly in the small time between t and t+k. Thus the equation above reduces to:

Ln Pit+k - Ln Pit = -γ(Zit+k - Zit ) + ct+k - ct + εiτ In a flood free property the flood status component cancels out leaving the average growth in a flood free property determined by the market growth rate plus a random error. n

γ = - 1/n ∑ ((ct+k - ct ) - Ln (Pit+k /Pit)) i=1

where t is some time period before the event and t+k is after the flood, n is the number of properties which have a sale before and after the flood event and are in the flooded cohort. The percentage change in price due to flood becomes (eγ-1)*100.

If the control population is used to estimate underlying market growth, c, then the difference in growth at each point in the post event history will give additional information. Essentially equation 2 is estimated separately for each time period (d) post flood n2

γd = - 1/n2 ∑ ((cd –cd-k ) - Ln (Pid /Pid-k )) i=1

where d is a post-flood time period and d-k is pre-flood, n2 is the number of properties which sold pre-flood and again in time period d. This sort of model can be estimated using a regression formulation for the entire population, positing Ln (Pid /Pid-k) as the dependant variable and using time dummies and flood status time dummy interactions as the independent variables. The significance of the flood effect is tested within the regression context.

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Research findings As described in the methods section the rich data acquired during the study was subject to several different analyses. It is reassuring to note that that the analyses all yielded consistent results. As an illustration of typical findings, Table 2 presents the results from the repeat sales analysis of individual locations, it shows that there were very few significant differences measured.

Those locations which had not flooded showed no negative impact on growth, despite the risk designation.

Two locations, Bewdley and Mold showed significant and temporary impacts of flooding. These results demonstrate that local factors can influence the impact of flooding on property price and that the case study approach was appropriate.

Table 2: Summary of individual case study models

Location

Last flood affecting property before 2000

Highest risk property in location

Number Flooded

Defences improved since 2000

Number of floods 1998-2007

Malton/Norton

1999

Significant

169

2003

2

None

Shrewsbury

1998

Significant

230

2003

4

None

Bewdley 1998 Significant 140

2002 3 2005

2001 2003

Ruthin

1960

Significant

250

2003

2

None

Barlby

1947

Moderate

152

2007

1

None

Lewes

1979

Significant

800

2004

1

None

Hatton

1957

significant

142

2006

1

None

Woking

1968

Significant

100

No

1

None

Mold

1976

Significant

181

2006

1

2002

Newport

1957

Significant

130

No

1

None

No but pump 1 repaired

2003 2004

Southsea 1953 Low 200

West Bridgford

08

Flood index coefficients significant 5% or better

1947

Significant

No

0

None

Wakefield 1983 Significant 2003 0

2004 2006

Positive or negative impact

Negative Negative

Negative

Positive Positive

Positive Positive

IMPACT OF FLOODING ON PROPERTY VALUES

When all analyses were combined the main findings were: Flood designation (on its own) had no effect on the growth of property price, those areas which were designated at risk but did not flood showed no impact and there was no measurable effect of the 2004 map launch in any location.

The existence of a longer term discount due to floodplain location originating before the 2000 flood was tested by a static hedonic model. No impact of flood designation on property price was found.

Flood events in low risk areas had no effect on property price. This may be because these are seen as exceptional and unlikely to reoccur. For example in Southsea there was a pumping station failure in an area at low risk with no impact on property price.

The combination of a history of flooding with a flood risk designation of “moderate” or “significant” sometimes led to temporary discount in the price of property. The scale of that impact was highly variable ranging from no impact to a significant measured impact of 30%. Flood history appears to be more important than flood designation in generating flood discounts. The impact of flood events on property prices were temporary, in these locations, three years after the flood all effects had disappeared.

The reported flooding patterns within the floodplain revealed that many people designated at risk of flooding, while acknowledging that they lived in a flood risk area, did not consider their property to be actually at risk of flooding. Many had justified that belief by citing evidence of elevation of land or property. This was an unsurprising result and concurs with the Environment Agency view that their maps are not suitable for assessing risk on individual properties.

Many residents experienced difficulties in obtaining and renewing insurance policies but in general insurance was available at a reasonable price for residents at risk of flood. Householders who experienced problems were usually able to get better terms by switching insurance company and consequently there were only a handful of residents who reported being unable to obtain insurance due to flood risk. A larger minority had accepted the exclusion of flood risk from their policy. Only one householder reported being asked to install mitigation measures to gain cover.

In addition, insurance cost was not determined by flood risk, other factors such as a history with their insurer or the company selected for insurance appeared to make more difference. It was therefore unsurprising that no significant impact of insurance was measurable on property prices.

The overriding feature of the property price data used in this study is strong growth over time. Findings based only on the hedonic model are subject to the limitation that the hedonic model was based on a small sample of properties and a limited set of explanatory variables.

Further research in periods of slower growth and a larger and more detailed hedonic analysis might yield further insight into the impact of flood designation on property price.

However, from the analyses already conducted we can conclude that there is not a devastating property blight in areas with a high risk of flood, a recent flood history or insurance problems. For property which is traded any flood status effect is small relative to location, property size and type.

Less than half the respondents to the questionnaire reported that they were fully aware of the flood risk to their property at purchase. Recent purchasers were more likely to be aware than longer residents. For transacted property about one third may have been alerted to the risk status of their potential purchase by insurance problems.

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Implications and recommendations These findings have both positive and negative implications for the viability of floodplain communities. On the plus side for the majority of homeowners, in the current market conditions, the medium term investment potential of their floodplain property appears sound. While this finding is slightly surprising, particularly when we consider the views of some professionals and past media coverage, it is not outside the range of findings of other research. The fact that flood events do not automatically devalue their home can provide reassurance to homeowners in the immediate aftermath of a flood event and may lessen some of their distress.

This reassurance can allow property stakeholders to invest in reinstating flooded properties with confidence.

The high availability of affordable insurance implies that most households have the means to restore their home.

These factors contribute to the maintenance of communities in the floodplain which, unless and until increased flood risk makes these communities unviable, is a desirable outcome.

If a property at risk of flood comes to market and the current owner has insurance then no discount for flood risk need be assumed. A recently flooded property can be treated in the same way but selling agents may wish to recommend that property is reinstated before sale and that, if possible, the sale is delayed until at least 18 months after a flood.

While these implications hold true for the majority of floodplain property there is a small minority for whom the study findings may not be representative. These are likely to be those at very high risk or frequently flooded and particularly those who experience difficulties in gaining insurance, The data on transactions may not include enough examples of this subgroup as they may not be traded very often. Further research on frequently flooded and highest risk property is recommended.

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However, the findings, reassuring as they may be for floodplain investors, should be seen within the broader debate about the moral hazard of the current regimes.

Many question whether it is desirable to support continued occupation of the floodplain without encouraging damage mitigation, or at all. The issue of who should bear the costs of increasing flood risk and at what juncture it is appropriate to retreat from the floodplain is a complex and politically charged one. Recent government policy has been directed towards encouraging existing floodplain residents to be prepared for flooding and to install flood mitigating features. These findings contribute to that debate as they indicate that the current insurance and disclosure regimes may not encourage behaviour which reduces the future damage from flooding.

IMPACT OF FLOODING ON PROPERTY VALUES

The study found that switching insurer allowed large up-front savings on premium and excess charges whereas improvements in resistance and resilience did not. Therefore, for the property owner with limited resources it makes more financial sense to change insurer rather than install measures. Another possible influence on property owner behaviour was the finding that many purchasers were not fully aware of flood risk.

Householders may be reluctant to undertake any measures which might signal to a potential buyer that the property is at risk and possibly make it more difficult to sell.

in the availability and cost of insurance in the future may also cause problems for sales of floodplain property.

It is not possible to predict from the empirical study what the effects of potential future changes would be. The results of international studies indicate that the impacts of risk designation and insurance premium increases are smaller on average than temporary impacts following a flood event. The impact of large scale withdrawal of insurance cover has not been measured. Policy makers should be aware of this possible additional risk to floodplain occupants.

The fact that no measurable impact of designation was detected suggests that the official view of flood risk is not capitalised into the price of floodplain property. This raises the further possibility that, if designation regimes changed, for example with the inclusion of a flood risk assessment into Home Information Packs, there might be an effect on property at high risk. The study found that insurance problems were not common enough to have a large impact on property transactions. Changes

Clearly there are some questions raised by the results of this study that could be pursued in future research. The possible effect of market shifts, for example a less buoyant housing market, changes in disclosure regimes, insurance policy changes, significant increases in flood risk or step changes in the awareness of flood risk could be tested when circumstances allow. This study has provided a framework for measuring future changes in a consistent and comparable manner.

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About the study This study was carried out by a team from the Property and Surveying Research Unit of the University of Wolverhampton. The team comprised Jessica Lamond, David Proverbs, Adarkwah Antwi and Felix Hammond.

The work was funded by the University of Wolverhampton, independent of any insurer. Thanks are due to Lloyds TSB and Norwich Union for advice on structuring the questionnaire and flood risk designation, and to the local Environment Agency offices for data on historic flood outlines.

Contact Jessica Lamond Property and Surveying Research Unit School of Engineering and the Built Environment University of Wolverhampton Wulfruna Street Wolverhanpton WV1 1SF e j.lamond@wlv.ac.uk

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IMPACT OF FLOODING ON PROPERTY VALUES

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Further reading Association of British Insurers (2008) Revised statement of principles on the provision of flood insurance. London: Association of British Insurers available from <http://www. abi.org.uk/Document_Vault/FINAL_AGREEMENT.pdf>.

Building Flood Research Group (2004) The impact of flooding on residential property values. RICS Foundation report London: Building Flood Research Group.

Chao, P. T., Floyd, J. L. and Holliday, W. (1998) Empirical studies of the effect of flood risk on housing prices. IWR report 98-ps-2, United States Army Corps of Engineers.

Eves, C. (2004) The impact of flooding on residential property buyer behaviour: an England and Australian comparison of flood affected property. Structural Survey, 22(2), pp.84-94.

Kenney, S., Pottinger, G., Plimmer, F. and Yasmin, P. (2006) Flood risk and property, impacts on commercial and residential stakeholder's strategies. Reading: College of Estate Management.

Lamond, J. and Proverbs, D. (2006) Does the price impact of flooding fade away? Structural Survey, 24(5), pp.363-377.

Lamond, J., Proverbs, D. and Antwi, A. (2007) Measuring the impact of flooding on UK house prices- a new framework for small sample problems. Property Management, 25(4), pp.344-359.

Lamond, J., Proverbs, D. and Antwi, A. (2007) The impact of flood insurance on residential property prices : towards a new theoretical framework for the UK market. Journal of the Financial Management of Property and Construction, 12(3), pp.129-137.

Lamond, J. E. (2008) The impact of flooding on the value of residential property in the UK. University of Wolverhampton, PhD Thesis available from http://hdl. handle.net/2436/31427.

Lamond, J., Proverbs, D. and Hammond, F. (forthcoming) Accessibility of flood risk insurance in the UK - confusion competition and complacency. Journal of Risk Research.

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Lamond, J., Proverbs, D. & Hammond, F. (in review) A transactional analysis of the impact of flood events on the price of residential property. Housing Studies.

Leishman, C. and Watkins, C. (2002) The estimation of house price indices based on repeat sales regression using Land Registry data. London: RICS Education Trust.

Lim, S. and Pavlou, M. (2007) An improved national house price index using Land Registry data. RICS Research Paper Series, Volume 7, Number 11 London: RICS. Pitt, M. (2008) The Pitt Review: Learning Lessons from the 2007 Floods. London: Cabinet Office available from <http://archive.cabinetoffice.gov.uk/pittreview/ thepittreview.html>.

Tobin, G. A. and Newton, T. G. (1986) A theoretical framework of flood induced changes in urban land values.

Water Resources Bulletin, 22(1), pp.67-71.

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