R31 - Housing Supply and MarketsReturn

Prices of houses in flood risk zones are subject to a price discount reflecting the risk of losses caused by floods. First, the article establishes a framework for pricing flood risk using the expected discounted loss approach, based on the capital asset pricing model and the Gumbel mixture model of estimated likelihood and impacts of flood risk events. The measure advantage is dimensionality reduction and interpretability. Second, the resulting measure of flood risk is tested to assess whether it can explain differences in house prices using a large data sample from the Czech Republic in 2024. I show that the flood risk measure, expected discounted loss, can be a significant predictor of house prices, but its explanatory power depends critically on the data source used for determining flood risk zones. The results indicate that the market does price flood risk but tends to underestimate its magnitude. Moreover, it does not adjust the weight assigned to flood risk even after severe flood events. Lastly, I discuss the potential use of the obtained flood risk loss distributions for the calculation of Value at Risk and other risk measures of portfolios, including direct real estate or real estate used as collateral.

This study investigates the challenges of affordable housing, delving into its concept and the diverse metrics used for measuring housing affordability, which influences the formulation of relevant affordable housing policies. The primary focus of this paper centers on defining the concept of affordable housing, exploring its implications for enhancing quality of life, and addressing the complexities involved in measuring its affordability accurately. Building upon the research, the paper proposes a possible optimal methodology for measuring housing affordability. This method suggests employing a price/rent-to-income ratio, encompassing a comprehensive assessment of housing-related expenses and a refined calculation of household income. Importantly, the study highlights the need for policymakers to differentiate between home-renters and homeowners when discussing housing affordability as well as between the immediate and structural lack of affordability.