Summary

Globally, the rising frequency and severity of droughts, tropical cyclones, floods, and heatwaves are inflicting significant economic damage. While existing research has primarily concentrated on the impacts of climate risks on developed countries, emerging economies with sizable market value, which are more vulnerable to the effects of climate change, have received little attention.

An event study and stacked difference-in-differences approaches are employed to estimate the effects of floods on the housing market within an emerging economy, with a specific focus on China. On average, the occurrence of floods leads to a 2.8% decrease in housing prices, while it surprisingly increases the transaction quantity by 36.6%. Despite the negative impact on property values, the volume of housing transactions remains brisk, possibly due to the attraction of lower prices for potential buyers. The severity of flood risk, financial aid allocation, and the disclosure of flood-prone information play significant roles in shaping the market’s response to flood risk.

Mechanism analysis shows that the market response to floods is influenced by public risk perception and short-term physical damage caused by floods. In areas with a history of frequent floods, the housing market appears to adjust more rationally, with buyers incorporating flood risk into their purchase decisions. Conversely, in regions where floods are less frequent, the market response tends to be more pronounced, with significant price discounts post-flood events. Short-term physical damage also affects housing prices by reducing prices as buyers care about property quality.

Flood-prone information disclosure helps to mitigate information asymmetry in the housing market. The disclosure of such information is found to reduce the information gap, leading to a higher price discount on flooded houses and a corresponding increase in transaction volume.

In conclusion, climate change-related risks such as floods significantly affect the asset market of emerging economies like China, which are priced in the housing market. Understanding and incorporating climate risks into housing market analysis and policymaking is crucial, particularly amid a backdrop of escalating climate-related disasters.