Real Estate Opportunities Provided by Climate Change?

Justin Gillis focuses on which U.S Eastern coastal areas are at increased flood risk due to rising sea levels.    People have to live somewhere. If specific areas such as Norfolk Virginia are at increased risk of flooding, what areas on “higher ground” will experience increased demand to live there?    Could real estate developers help the coastal population to adapt to climate change by identifying geographic areas that have natural advantages in coping with emerging risks?  This is free market adaptation.  Implicit in Gillis’ claims is the belief that we will continue to rebuild our cities in the same places using the same materials and continually repeat our same mistakes in the face of new risks.    There is a group of rational choice economists who argue that we learn from our past mistakes.  This is an interesting debate that offers several testable hypotheses!  If the people of Norfolk Virginia want to keep things as they were, then they are free to do so but should use their own resources to finance their efforts.  If federal subsidies are offered then spatial moral hazard arises.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

17 thoughts on “Real Estate Opportunities Provided by Climate Change?”

  1. The “learn from past mistakes” thing might be poorly-matched to the timescale of the problem. It’s not uncommon for a parcel of land to stay in the same hands for 70 years. If those 70 years are the span 1980 (starting before global warming was really well known) to 1950 (a date when your parcel is actually valueless, either underwater already or obviously doomed to be soon) then you’re sort of screwed. If you own this land now, it may be that the only way to “learn from” your “past mistake”, if indeed it was one, is to sell your land to a Greater Fool who hasn’t.

    (And the last fool in the chain has a pretty convincing sob story to tell the Army Corps of Engineers while begging them for more beach sand/floodwalls/etc.)

  2. There’s also an informational moral hazard problem – developers in Virginia and North Carolina using their political power to hide information about sea level rise from being incorporated into goverment documents.

    As for higher elevation properties being able to profit, that’s really difficult in that it’s hard to predict exactly how much rise will occur and when it will occur. A property could increase in value as it transitions to an oceanfront location, and then drops to valueless.

    The best test of these theories would be in relatively unpopulated areas that have little chance of being protected by sea walls/levees.

    One other option for climate denialist landowners – sell 99-year options to obtain ownership of their land for token value should it become uninhabitable. Denialists will be willing to see this cheaply. Science believers will be willing to buy in order to get whatever residual value the land has other than residential use (harvest, recreation etc.).

    1. Your last paragraph raises an interesting question.

      Suppose I own a waterfront lot in an expensive neighborhood. Suppose over the next decade the water rises and my lot becomes underwater. I think I still own the land, even though it’s under water, because I have a deed registered with the County Clerk.

      The person who owns the lot behind mine will now own waterfront property. Can I charge him a toll to cross my lot to get to open water?

      1. Ken no, there’s a public right to navigate water, especially the ocean. Your neighbor can cross over your land but couldn’t put in a fixture like a dock without your permission.

        1. Some years ago there was a BBC show illustrating finer points of law and this incident was recounted.

          The Thames flooded outside London and a resident paddled his shallow-draught dinghy down the street. A Land Rover met him head-on coming in the opposite direction.

          The driver demanded the boatman paddle on the left side of the street, which is the rule for British roads. The boatman claimed passing should be port-to-port, which was the river rule.

          It came to court and the judge decided: it’s a river.

  3. If the people of Norfolk Virginia want to keep things as they were, then they are free to do so but should use their own resources to finance their efforts.

    Let’s see.

    You smash into my car, causing extensive damage. Would you argue that, “If byomtov wants to get his car back into the shape it was before I smashed it, he is free to do so, but should use his own resources to finance hs efforts.”

    I am growing extermely irritated at your posts becsue you consistently overlook the question of responsibility, as if climate change were being caused by extraterrestrial aliens beyond our control. The question of responsibility just doesn’t seem to have ever entered your consciousness.

  4. Anyone interested in a piece of prime beachfront property in Somerville, Mass.?
    I mean, it’s not actually beachfront yet

  5. Hey, maybe we can sell all that beachfront property to the 150 million people of Bangladesh whose country will be underwater. This is free market adaptation, hurray!

  6. If people learned from their mistakes, then we wouldn’t have housing in storm- and hurricane-prone areas getting rebuilt over and over again with federally-provided insurance. I think the most realistic outcome of rising sea levels is that a combination of coastal cities, developers, and citizens get the federal government to fork over money to build in protections and provide insurance against worsening floods, right up to the point where it becomes all but impossible to avoid.

  7. Mark, your use of the word “beachfront” provides a worthwhile jumping-off point. What we normally think of as “beachfront” property is at the intersection of mean-sea-level, a certain sort of ecosystem and viewshed (sand, water, marshes), and a whole lot of infrastructure—a road and a right-of-way that runs parallel to the water, for example; a seawall and jetties. You can let the sea into Somerville (sea-level-wise, there’d be a nice inlet between Inman and Union Squares) but that doesn’t turn Cambridge Street into beachfront property.

    Maybe you get thirty years of “property facing the post-superstorm urban blight zone”, and thirty years of “property facing the muddy tidal slough after the big demolition project”, and ten years of “property that’s in danger of falling into the slough while you beg Somerville to build a seawall”, and fifty years of “your property falls into the slough and they build the seawall fifty feet behind you”.

  8. The people of Norfolk (and New Orleans and all the other port and seaside cities) moved there and built cities because the rest of us asked them to. We wanted the goods that were cheaply transported by cargo ships, and we wanted the money that came from loading goods onto cargo ships to be sold elsewhere. We wanted motels and restaurants and all that other stuff with a nice view.

    So of course when people who responded to market signals from the rest of the country and the world find themselves in trouble as a result we should view it as their problem with a side order of opportunity for profit.

  9. Local problems should be handled locally. You have an earthquake? Why did you build in places where earthquakes happen? Same for floods, tornadoes, fires, etc.

    And don’t get me started on those New York leeches who sustained a terrorist attack on Sept. 11. Not only did they expect the state to help them rebuild, but they actually counted on the federal government to improve security and to actually go to war on their behalf.

  10. So if there are federal subsidies to the people of Norfolk VA (for building of dikes and whatnot), you see moral hazard, but if we allow real estate speculators to enrich themselves from the misfortunes of others, no moral hazard? Wouldn’t the latter be a pretty spectacular example of NOT learning from our mistakes?

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