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Are you interested in how preparing your house to resilience can increase its value?
Our debate today works with the article titled Adaptation infrastructure and its effects on property values in the face of climate risk from 2022, by David L. Kelly and Renato Molina, published in the Journal of the Association of Environmental and resource Economists.
This is a great preparation to our next interview with Ben Gilliland in episode 402 talking about the opportunities in adapting our houses to climate change.
Since we are investigating the future of cities, I thought it would be interesting to see how investments in climate adaptation infrastructure influence real estate prices. This article shows that homebuyers and sellers need to recognise that preparing infrastructure not only increases its value, decreases its premium in insurance, but also successfully alleviate potential environmental threats.
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Welcome to today’s What is The Future For Cities podcast and its Research episode; my name is Fanni, and today we will introduce a research by summarising it. The episode really is just a short summary of the original investigation, and, in case it is interesting enough, I would encourage everyone to check out the whole documentation. This conversation was produced and generated with Notebook LM as two hosts dissecting the whole research.
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Speaker 1: today we are looking at a collision between three really massive forces, climate risk, public finance, and the relentless logic of the real estate market. We’re focusing on Miami-Dade County, which is arguably the most vulnerable urban environment in the continental United States when it comes to sea level rise. The central question driving our discussion today is pretty stark in the face of rising oceans. Does local government infrastructure actually stabilize the real estate market, or are we quite literally just throwing money into the ocean?
Speaker 2: It really is the multi-billion dollar question, isn’t it? We’re dissecting a study adaptation infrastructure and its effects on property values by David L. Kelly and Renato Molina, and they looked at 162 infrastructure projects. And I think over 400,000 property transactions between 2020 19.
Speaker 1: A huge data set.
Speaker 2: A huge data set. And the core question they’re trying to answer is whether spending public money on things like pumps, sea walls, road elevation, does that result in tangible economic benefits for homeowners? And does the market rationally price that protection in?
Speaker 1: And my position on this is clear. The data from Kelly and Molina, I think. Demonstrates that this adaptation infrastructure is a resounding economic success. We are seeing massive returns on investment, and it proves that markets are in fact, rational enough to reward resilience.
Speaker 2: And I guess I just view it with significantly more skepticism. While the studies certainly shows that prices rise, the benefits are incredibly localized, I’d say suspiciously, and they’re very slow to materialize. I would argue these are really just band-aid solutions. They might give a false sense of security propping up asset prices in the short term, but they don’t solve the fundamental long-term climate crisis.
Speaker 1: I understand the skepticism. I do, given the magnitude of the threat, but let’s just look at the hard numbers that the authors provide. This isn’t theoretical modeling. This is empirical evidence. They analyzed 162 discrete adaptation projects, drainage, pumping stations, sea walls. They track property values using a repeat sales model before and after completion, and the headline figure here is just undeniable. The completion of these projects leads to significant gains in property values. When you subtract the adaptation costs, these projects generated nearly $300 million in aggregate net benefits across the sample. That’s wealth preservation, plain and simple.
Speaker 2: I’m not disputing that there’s a positive number on the ledger, but we do need to contextualize that wealth. We need to ask what is actually being preserved here.
Speaker 1: Let me finish the thought on the cost benefit analysis first, because this is crucial for the policy argument. The average project in this study cost about $1.13 million. The aggregate mean benefit net of that cost was about $0.68 million per project. That means the vast majority of these efforts are passing a rigorous benefit cost test. This validates the role of local government. An individual homeowner can’t build a neighborhood drainage system. The government stepped in, built it, and the market signaled that this value was real.
Speaker 2: I’m sorry, but I just don’t buy that. It’s that clean of a victory. You’re citing the aggregate figures, but when you dig into the spatial data, the picture gets well, it gets much more complicated. The authors identify what we might call the 200 meter rule. The data shows that these benefits are concentrated intensely within just 200 meters of a project boundary. You move further away than that, literally a block or two, and the price effect just evaporates.
Speaker 1: But that’s just the nature of physical infrastructure, isn’t it? A pump only drains a specific basin. A sea wall only blocks waves on a specific frontage. You can’t expect a pump on fifth Street to protect a basement on 15th Street.
Speaker 2: No, but think about what that implies for the broader market. We’re talking about very marginal improvements, cleaning a catch basin, installing a pump, maybe elevating a specific stretch of road. These projects protect against nuisance flooding the day-to-day high tides. They do not protect against the extreme sea level rise that’s predicted in the long term. The study explicitly notes these projects are unlikely to protect against very high future levels. So while the ROI looks great on paper that $0.68 million net benefit, it relies on the assumption that these properties should be saved at all rather than abandoned. Are we just efficiently pricing deck chairs on the Titanic?
Speaker 1: That brings us directly to the core of the debate then regarding market rationality. You seem to think the market is being foolish for valuing these improvements, but the mechanism, the authors used a difference in differences approach. It shows a pretty sophisticated response. They effectively compare the treated group, so homes near the new pump against a control group of homes far away. And they do it over time to isolate the specific impact. And what they found is that prices rise approximately 10% five years after a project is completed. That is not a trivial fluctuation. It’s a distinct signal that buyers and sellers are aware of flood risks and they really value the mitigation.
Speaker 2: But look at the timeline you just mentioned five years.
Speaker 1: Yes, real estate is an illiquid market. It takes time for information to permeate,
Speaker 2: but five years, that implies a significant information in efficiency. If the efficient market’s hypothesis held water here, the price should jump immediately upon completion or even when it was announced. The authors found a slow adjustment pattern, and this suggests that buyers don’t realize a pump was installed until they physically sit through a storm and see that their straight didn’t flood. The study even backs this up with what they call the visibility bias. They found highly visible projects like elevating a road had larger initial impacts than the invisible ones like underground pumps.
Speaker 1: And why does that matter if the value is eventually captured?
Speaker 2: Because it suggests the market is reacting to optics as much as, or maybe even more than actual risk reduction. If I can’t see the pipe, I don’t pay for the pipe, even if that pipe saves my basement. That’s not a rational pricing of risk. That’s a pricing of aesthetics. It suggests the sophistication you’re praising is actually just a reaction to what’s right in front of the buyer’s face. The market isn’t doing the math on hydrology. It’s doing the math on curb appeal.
Speaker 1: I see the distinction you’re making, but I’m not convinced by that because the end result is the same. Whether the price adjustment happens on day one or day 1000. The value is eventually captured. The study shows that these deviations from fundamental value, that mispricing you’re worried about. They eventually correct. By year five, the market has incorporated the value and let’s not dismiss the invisible projects. The data shows drainage and water holding infrastructure still generate large significant effects at the project boundary, the market learns. It just learns through experience, not speculation.
Speaker 2: It learns slowly. In a climate crisis, speed matters. If it takes five years to price in a pump, how long will it take to price in a collapsing ice shelf? But let’s pivot to the financial magnitude, the internal rate of return, or IRR,
Speaker 1: gladly, if you assume a five year horizon, the IRR on these projects is 19% per year.
Speaker 2: 19%,
Speaker 1: yes. That’s an incredible investment return. It justifies the taxes. It shows the market is working,
Speaker 2: or it shows the market was broken to begin with. In finance, if you see a risk-free return of 19%, you assume you’re missing something, or it’s a scam That is an excessively high number for public infrastructure. It implies that the pre-project properties were so significantly discounted due to flood risk. The market was punishing these homes severely. The government steps in, spends a million dollars and unlocks millions in value. Sounds great, but it implies the risk was very real. My concern is that the protection provided is being overestimated by the buyers. The authors note that risk perceptions change after a project is built. People feel safer, but are they safer from a category five storm or just from a king tide? If the market is pricing in permanent safety based on temporary relief, then that 19% return is a bubble waiting to burst.
Speaker 1: I just disagree with the characterization of it as a bubble. The authors used a very robust dataset, 431,410 transactions. They controlled for everything, elevation, distance to coast, number of bedrooms. They stripped out the noise. What’s left is a clear signal. Adaptation works 117 out of 158 projects had positive net benefits. That is a 74% success rate in a complex environment. You can argue about the long-term timeline of climate change invalidly, but in the medium term, which is the horizon for most homeowners and mortgages, these investments are rational and profitable.
Speaker 2: Profitable for whom though the homeowner gets the price bump, the city gets the tax revenue. But let’s talk about intensification. This is the moral hazard I was alluding to earlier. The effects of these projects are strongest near the coast. In fact, the authors found that when they restricted the sample to coastal properties, the estimates for the value of protection became even larger,
Speaker 1: which makes sense. That’s where the risk is highest. So the value of mitigation is highest. That’s not moral hazard, that’s just supply and demand.
Speaker 2: But by subsidizing safety in the highest risk zones, we are incentivizing people to stay there. We’re incentivizing density in the very places that might be uninhabitable in 50 years. The authors explicitly discuss the trade off between protection and retreat. If the government signals, we will protect you. Prices rise, development continues. If the government signaled we cannot save, this prices would crash and retreat would begin by building these projects. Miami-Dade is effectively choosing a policy of resistance over retreat. The value the study measures might just be the amenity of living near the beach, conflated with the safety of the infrastructure, we are paying to keep the view, not necessarily to secure the future.
Speaker 1: I think that’s a very cynical reading of adaptation. The study covers 2000 to 2019. We are dealing with the built environment as it exists today. We can’t simply abandon a metropolitan area with millions of people overnight. These interventions allow the community to function, and what’s the alternative if we don’t build the pumps? Nuisance flooding destroys property value immediately. The study points out the benefits. The avoided loss of value exceed the cost of flood insurance. Which is about 3.8% of property value over time.
Speaker 2: But that assumes insurance is priced correctly, which is, that’s a whole other debate
Speaker 1: perhaps, but consider the tax base. The authors calculate that the tax revenue from these preserved property values pays off the project costs in under 30 years. That’s fiscal responsibility. It keeps a municipality solvent so we can tackle the bigger problems. If the tax base collapses because of flooding, the city can’t afford to do anything, let alone plan for a managed retreat. You need a functioning economy to pay for the transition you want.
Speaker 2: That is a compelling argument for the city treasurer. I’ll grant you that, but there’s another side to this. Crowding out the model suggests something interesting when public infrastructure is built. The incentive for private adaptation like retrofitting your own home, it decreases.
Speaker 1: But this study argues that’s efficient. That is the classic argument for public goods. You and I can’t build a networked drainage system. The free rider problem is rampant. If I build a sea wall and you don’t, the water just goes around my wall and floods you. This is a coordination mechanism that allows a city to exist.
Speaker 2: That logic holds if the public solution is perfect. We’ve established these are marginal improvements. If the county builds a pump, I don’t bother to flood proof my garage. Then a major storm hits that overwhelms the pump and my garage is flooded because I relied on the public infrastructure. We are replacing private responsibility with public debt, and the homeowner is left vulnerable
Speaker 1: as we move toward a conclusion. I just wanna reiterate the strength of the evidence here. This is one of the most comprehensive studies of its kind. The finding that adaptation infrastructure leads to a 10% appreciation after five years. That’s a benchmark for other coastal cities. It tells us we don’t have to just retreat, we can adopt and the market will support it. The fact that tax revenues alone pay for these projects in 30 years makes them visc sustainable. This is a blueprint for resilience,
Speaker 2: and I’ll summarize by just urging caution. The math works for the period of 2000 to 2019, but the climate is not static. That 10% bump is real, but it’s fragile. It relies on a market that learns slowly, taking five years to digest information, and it prioritizes what it can see over what’s happening underground. The fact that the benefits fade after 200 meters tells me we’re creating tiny islands of value in a sea of risk. We should be very careful not to confuse a temporary stabilization of real estate prices. With a permanent solution to the climate crisis, the market is pricing in relief, not salvation.
Speaker 1: That is a fair distinction. We’re navigating uncharted waters here, literally and figuratively, but for now, the data suggests that when we build the wall or the pump or the drain, the community responds with value
Speaker 2: and let’s just hope that value holds when the water rises another foot.
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