WATER RESOURCES BULLETIN
VOL. 22, NO. 1 AMERICAN WATER RESOURCES ASSOCIATION
A THEORETICAL FRAMEWORK OF FLOOD INDUCED
CHANGES IN URBAN LAND VALUES'
Graham A. Tobin and Thomas G. Newton2
ABSTRACT: By integrating literature from flood hazard research
and urban economics a theoretical structure is developed to explain
changes in residential land values following flood events. The nega-
tive aspects of the flood hazard are shown to be capitalized in the
value of the property. It is further suggested that land values (i.e.,
capitalization) will vary both spatially across the floodplain and tem-
porally depending on the frequency, severity and spatial characteris-
tics of the flood event. Previous work in this area has not addressed
the capitalization process explicitly and has not specifically examined
the ability of the land market to recover. This may account for the
contradictory findings in the published literature.
(KEY TERMS: flood hazard; land values; capitalization; theoretical
framework.)
INTRODUCTION
A natural hazard perspective has been utilized in con-
temporary studies of the impact of flooding on property
values (see, for example, Babcock and Mitchell, 1980; Dam-
ianos, 1975; Sheaffer and Greenberg, 1981; Zimmerman,
1979). A basic premise of these studies is that flood events
and public intervention will have some influence on the mar-
ket value of property. While it seems reasonable to hypothe-
size that floods will have a negative effect on such values and
conversely that alleviation projects will have a positive in-
fluence, this has not been fully supported by the research.
To a certain degree, problems have arisen because of the
limited availability of data and an inability to control for
other variables that influence land values. In addition, a
shortcoming of the flood hazard literature is the absence of
a more explicit theoretical framework on which subsequent
work might be based or compared. Such a framework is also
missing from recent proposals for future research on floods
and their mitigation. Changnon, et aL (1983), described a
variety of problems that need to be considered if the pro-
ductivity of flood prone land is to be enhanced. While of
value to the hazard researcher, this work, like many previous
studies, is limited by only implicit consideration of theory.
The work of Damianos (1975) is an exception. In this work,
land rent theory was used to evaluate the impact of various
1Paper No. 85014 of the Water Resources Bulletin. Discussionss are open until October 1, 1986.
2Respectively Assistant Professor and Visiting Assistant Professor, Department of Geography, 316 JH, The University of Iowa, Iowa City, Iowa
52242.
67
FEBRUARY 1986
flood hazard reduction policies on residential property values.
Significant differences were found in the values of protected
and unprotected properties but it was recognized that other
locational and hydrological factors could be affecting pro-
perty values. Nevertheless, this work maintained a dichoto-
mous nature of the flood hazard, namely the presence or
absence of a flood risk. The attempt to incorporate a theore-
tical base, however, is commendable.
l'his paper will address some of these issues. A partial
theoretical framework is provided to enhance the understand-
ing of the potential impact of flood events on residential
property values in metropolitan floodplain areas. Specifically,
flooding is assumed to have a negative impact on land values
through capitalization of the flood event, with the degree of
impact dependent on the frequency and severity of the ha-
zard. The paper, then, is an attempt to provide a general
research framework by integrating portions of the hazards
literature with basic concepts from urban land economics.
COSTS AND BENEFITS AS CHANGES IN UTILITY
Costs of flood damages have been defined fairly loosely
in the hazards literature and generally on a case-by-case basis.
One notable exception is the work of Foster (1976), in which
consideration was given to both the benefits and costs asso-
ciated with floodplain management. Several scenarios were
presented concerning the potential economic impacts of dif-
ferent alleviation strategies on floodplain land values, with
a view to reducing socially suboptimal decisions. The im-
portance of this work lies in the incorporation of the econo-
mic assumption of a real estate market, in which changes in
the utility derived from a land parcel are manifested as
changes in land value. That is, changes in the net income
potentially available from a land parcel will result in those
changes being capitalized into the real estate value of the same
land parcel. This assumption underlies a theoretical frame-
work which has been developed in the urban economic
literature (Bish and Nourse, 1975; Grether and Mieszkowski,
WATER RESOURCES BULLETIN
 Tobin and Newton
1974). Foster has used the framework to explain increases
in urban land values following implementation of alleviation
projects. A similar argument is developed here to explain
some of the dynamics of the residential real estate market in
metropolitan areas under a variety of flood conditions.
CAPITALIZATION
Within the market economy of an urban area, one can
expect land values to be a consequence of a variety of fac-
tors. Grether and Mieszkowski (1974) showed that the prices
paid for single family dwellings were influenced by the physi-
cal characteristics of the buildings and locational attributes
of the houses. Li and Brown (1980) found that hedonic
housing prices varied with so-called microneighborhood char-
acteristics including aesthetic attributes, accessibility, and
externalities as well as housing characteristics. This is not
unlike the work by Reynolds and Honey (1978) which
described the impact of noxious and salutary facilities on land
values. Further, land values are not necessarily purely a func-
tion of the competitive urban land market but may also be a
consequence of the interaction of government and capital in-
vestment (Roweis and Scott, 1981). However, if urban de-
velopment has encroached into flood prone areas, then land
values may also be adversely impacted by factors associated
with the physical environment. More specifically, land values
will decline to the extent the flood risk reduces the utility
of the land. This decline is an instance of the capitalization
of an environmental externality, namely the flood event.
Capitalization has been implicitly addressed in several case
studies which investigated the associated problem — the im-
pact of flood mitigation programs on land values. None of
these studies arrived at more than tentative conclusions re-
garding the impacts on property value, with most suggesting
that floodplain regulation had little effect. (For a brief, but
useful discussion of these research findings see Muckleston,
et al., 1983.) The shortcomings of these partcular studies
were largely methodological and conceptual. In general,
research was based on very few data or the opinions of several
selected officials. However, in a recent survey Shilling,
et aL (1985), did find that some of the costs of flood in-
surance were capitalized into the selling price of houses in
flood prone areas, but did not consider the potential vari-
ability of the flood hazard. Consequently, it appears worth-
while to elaborate and extend the urban economic notion of
capitalization as found in Damianos (1975), Foster (1976),
and Shilling (1985) to include specific hazard characteristics.
To this end, the relationship between flooding and land
values will be discussed through consideration of capitaliza-
tion of the impacts of actual flood events into land values.
Emphasis will be placed on the importance of understanding
the temporal and spatial variation in the flood event in this
capitalization process.
68
CAPITALIZATION AND THE FLOOD EVENT
If one assumes that actors in the urban land market cannot
predict the flood event and that other aspects of the metro-
politan real estate market remain constant, the occurrence of
a flood event wifi reduce land values through damage to struc-
tures and land in the floodplain. These damages represent
reductions in the utility that property owners derive from
the flooded land parcels, as shown in Figure 1. The extent
of this reduction in utility will be dependent upon the tem-
poral, spatial and hydrologic features of the flood hazard.
The subsequent recovery of the land market will be dependent
on various socio-economic criteria found in the metropolitan
area along with the prevailing flood conditions. (For these
purposes, the starting point on this and subsequent graphs is
assumed to be the same. Clearly this will not necessarily be
the case, since levels wifi fluctuate according to previous in-
cidents of flooding and other characteristics of the urban en-
vironment.)
a>- flood
I- event
-J
I-
'U
-J
4>
recovery
0
z4
-J
TIME
Figure 1. The Negative Impact of a Flood on Utility and Hence
Land Values. The recovery of the land market wifi be dependent
on various socio-economic and environmental characteristics.
Flood Frequency
In this context, one temporal influence on land values will
be the frequency of flooding. The reduction in utility ex-
perienced by the owners of property located on the flood-
plain may depend on the recurrence interval of the flood
event. Specifically, land values in areas of repeated flooding
will reflect the short flood return interval and remain low.
The market in this instance does not have sufficient time to
recover before the next flood event occurs, as shown in
Figure 2. The land values of those areas which experience
only rare events, however, will decline initially due to the
flood and then return to levels at or near those prevailing
prior to the event (see Figure 3). Depending on the frequency
of the flood event and the ability of the market to recover,
WATER RESOURCES BULLETIN
 A Theoretical Framework of Flood Induced Changes in Urban Land Values

property values could fluctuate substantially over time (Fig-

ure 4). This occurs because the temporal component of the
hazard, frequency, is incorporated into the capitalization pro-
>-
I- flood
events
cess as a factor of disutility. Hence, it would be interesting -j I I
to establish whether there is a predictable relationship between I I
I I
the flood recurrence interval and the ability of the land mar I I
ket to recover to previous levels. uJ
1
4
flood z
events 4
-J
, I I I I
I I I I I

TIME
Figure 4. The Impact of Periodic Flooding on Land Values.

Flood Frequency and Land Availability

Another time-dependent component of flood hazard
I I I I -- capitalization concerns the elasticity of the land values in the
TI ME metropolitan area. For instance, conditions may be such
that the utility derived from a particular piece of land will
fall initially because of the flood, then return almost imme-
Figure 2. The Impact of Frequent Flooding on Land Values.
diately to near preflood levels. In addition, repeated flood-
ing may not have a permanent impact on land values. This
situation could arise in a metropolitan area which is under-
going rapid development but possesses only limited open land,
flood so that the area flooded may represent one of the few po-
event tential development sites within the urban area. As a result,
land values, though diminished by the flood event, return to
earlier levels very quickly due to demand and supply condi.
tions within the metropolitan area. It should be stressed,
however, that such a phenomenon could occur independent
of flood frequency. This situation also could be evident in
urban housing markets, where inelastic demands for real es-
tate in certain neighborhoods may have caused high prices
for housing located in the flood prone area (Schnare and
Struyk, 1976). Similarly, improvements to the housing
structure, in terms of flood proofing or placing property on
. U U U U I I U U
stilts above flood levels, might have the same effect.
TI ME
Flood Severity
Figure 3. The Impact of a Rare Flood Event on Land Values. The degree to which flooding will influence land values
and the subsequent recovery of the land market will also be
influenced by the severity of the event. This can be illus-
Such changes in utility and hence land values may in part trated by examining the probable impacts of a catastrophic
explain why some studies have found little difference in flood. In this case, the actual surge of water would most
property values before and after a particular flood event (see, likely destroy many structural improvements made to the
for example, Sheaffer and Greenberg, 1981). That is, the land, which in turn would reduce the value of that land. The
frequency of flooding may have been sufficiently high at the rate of recovery of land values following this shock to the
study sites, such that major reductions in utility had already land market may then be contingent upon the extent of
been capitalized into land values and were not reflected in the damage. In a catastrophic flood, damage could be so great as
serial comparisons of property values. to preclude any noticeable recovery in land values as shown

69 WATER RESOURCES BULLETIN

 Tobin and Newton
in Figure 5. Indicative of this might be the conversion of
once residential or commercial areas to open space and park-
land as occurred in Rapid City,, South Dakota, following a
major flood in 1972.
>.
I.-- catastrophic
-j flood
I--
w.
-J
4.
>
0•
z Montz (1983) showed that housing values, as perceived by
4 real estate and insurance agents, as well as mortgage lenders,
-J.
, . I I I I I I
TI ME
Figure 5. The Impact of a Catastrophic Flood
Event on Land Values.
While major events may have this long-term impact on
land values, other traits of the flood hazard may also in-
fluence the rate at which the land market recovers. In es-
sence, it is suggested that the more severe the flood experience
(in terms of greater depth, longer durations or higher veloci-
ties) the greater the structural damage and hence the more
apparent the capitalization process. The subsequent recovery
period from the hazard will, in part, be directly related to
the degree of damage experienced. The rapidity of increase
in land values will be dependent upon the rate of increase in
the utility of the land — the faster the increase in utility
the faster the increase in land values.
The Flood in a Spatial and Temporal Context
To this point, the severity and temporal characteristics
of flooding have been shown to have both long and short
term effects on floodplain land values. However, these ef-
fects are not necessarily homogeneous across the floodplain,
assuming other factors remain the same. Flood severity
will not be uniform across the floodplain, so the impact on
land values and utility can also be expected to vary across
the floodplain. This is suggested from the empirical results
of Li and Brown (1980), who found that externalities main-
tained a spatially variable effect on hedonic housing prices.
Thus, discussions centered purely on land values in and out
of the flood or in and out of the 100-year floodplain are
not necessarily valid. It is this effect of capitalization which
has not been explicitly accounted for in many studies cited at
the beginning of this paper. Therefore, the rather negative
70
and sometimes contradictory findings described in these
studies may be the result of inadequate attention to two as-
pects of the flood hazard: (1) the variation in temporal as-
pects of land value appreciation and depreciation, and (2)
the site-specific differences in the intensity of the flood ex-
perience.
CONCLUSIONS
The application of the preceding theoretical framework to
flooding provides an interpretation of changes in floodplain
land values and an explanation of the characteristics which
underlie those changes. This is not to suggest that such a
process of capitalization is the sole criterion through which
the flood hazard can influence land values. For instance,
remained unchanged despite implementation of the National
Flood Insurance Program. Such an occurrence may be sig-
nificant, given the importance of such actors in the urban
land market. Further, other factors, particularly the elasti-
city of the land market, should not be ignored.
Still, questions remain about the extent to which charac-
teristics such as flood severity and frequency influence land
values through the capitalization process. Therefore, the
development of an empirical model would be useful in this
respect. To this end, the utilization of models, which mea-
sure environmental effects on property values, could provide
a suitable methodology for testing the preceding theoretical
framework. For instance, Palmquist (1981) introduced a
fairly straightforward technique for examining the relation-
ship between environmental quality and property values. This
approach allows for the estimation of environmental effects
without the concomitant and often onerous data collection
requirements, as is the case with the hedonic models em-
ployed by Li and Brown (1980).
Finally, this paper has focused only on changes in resi-
dential land values associated with the occurrence of a flood
event in a metropolitan area. Similar studies might be made
of the impacts of flooding on agricultural land. For instance,
are the rents charged to farmers and local residents by the
U.S. Army Corps of Engineers for land seasonally flooded
around reservoirs subject to this capitalization process? Addi-
tional empirical work will focus on this phenomenon. Last-
ly, an extension of this framework will be developed later to
examine the effects of floodplain management and other
mitigation policies on land values in metropolitan areas.
ACKNOWLEDGMENTS
We are grateful for the constructive comments of Professor Peter
Fisher, University of Iowa; Professor Burrell Montz, University of New
York, Binghamton; Professor Keith Muckleston, Oregon State Univer-
sity; and the anonymous journal referees. The authors take full
responsibility for any errors that may remain.
WATER RESOURCES BULLETIN
 A Theoretical Framework of Flood Induced Changes in Urban Land Values

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71 WATER RESOURCES BULLETIN