Changes in Public Risk Perception after a Large Disaster: Evidence from the Housing Market

The unprecedented damage caused by the Great East Japan Earthquake and nuclear disaster greatly altered people’s awareness of risk not only in directly affected areas but also in unaffected areas as well. This study focuses on the relationship between earthquake risk and real estate prices in unaffected areas before and after the earthquake in order to explore how large-scale natural disasters influence people’s perception toward disaster risk. We use large-scale property transaction data covering periods both before and after the earthquake, together with the earthquake risk indexes by the Tokyo Metropolitan Government, to estimate a hedonic model. Our empirical findings are summarized as follows. First, we found that after the 2011 earthquake house prices are dropped more in relatively risky areas than in safer areas. In comparison, we could not find any evidence that housing rents are decreased more in risky areas as compared to safer areas. These results suggest that changes in risk perception are found for prospective homebuyers, rather than for tenants. Second, post-quake price drops are particularly eminent for properties built under the new earthquake resistance standards, those located on upper floors, and those with three- or more bedrooms. Third, we found that significant post-quake price discounts can be observed for three to five years following the earthquake, after which price levels return to their pre-quake baseline.