The economic value of cyclonic storm-surge risks: A hedonic case study of residential property in Exmouth, Western Australia

Abstract

Recent major coastal disasters in the Asia-Pacific region have resulted in a massive loss of life and high societal costs. Unbridled development, growing coastal populations and injudicious land planning amplifies the predicted disaster risk due to climate change and extreme weather events. As it typifies expanding coastal development in areas prone to extreme weather events, the town of Exmouth (NW Australia) was used to investigate economic strategies for coastal risk mitigation. Recent marina development, with a loss of disaster mitigating ecosystem functions, has increased risk to previously unaffected areas. The extent to which risk perceptions of cyclonic storm-surge inundation and flooding influenced the price buyers paid for residential property in Exmouth over the period 1988–2013 was examined using a Hedonic Price Model. The analysis indicated that prices did not reflect the real societal cost of risk. Due to the absence of a monetary signal, such as higher insurance premiums, buyers tended to be risk insensitive and give greater weight to coastal amenity. To internalize these costs, a mandatory private insurance scheme for high-risk properties, penalties for local councils undertaking unsustainable developments, and a hybrid economic instrument aimed at correcting the market failure in coastal land, is proposed.