4.01.2007

Beachfront Values

I've been reading through the articles over at realclimate.org, a blog on climate matters run by climatologists. Check out their hilarious April 1 post. Meanwhile, we spent a weekend at North Myrtle Beach. I started mulling over the connection today after lunch. From a game theory perspective, what would we expect beachfront property prices to do as sea levels rise?

To make the problem more concrete, suppose that within the next ten years it becomes clear that the melting of the Greenland ice is accelerating, and will result in a one meter rise in sea levels by 2100. A glance at current trends shows that, while this is faster than current rates, isn't out of the realm of reason. You can see graphically here what the results might be (based on current flooding patterns). Much of the beachfront will be effectively wiped out in this scenario.

Let's assume there's a $1M property on the beach that will become worthless in 2100. How much is it worth now? Assume there is still 80 years of utility left before the property value drops to about zero. On one hand, no one would want to be left holding the bag in 2100. On the other hand, there's no reason to assume that rental income would drop in the meantime. So hotels and condos that rent out to vacationers would continue to enjoy good profits. In fact, one could argue that rents would increase because of the impending scarcity. Therefore property values will not immediately drop to zero. I suppose a naive calculation could be based on expected return on investment. If there are n years left, and you want an annual rate of return of r on your investment, and assuming that our property has a fixed annual rental income of I (net after paying for operations), then Max Price = I(1+r)^n. Here, n decreases as time runs out. So basically, my first guess is that property values will decline exponentially. Since r is probably related to the interest rate on bonds, the higher inflation is, the faster the decline.

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