Modelling the impact of earthquake activity on real estate values: a multi-level approach

Purpose – This paper seeks to look at the impact of recent earthquake activity on house prices and their spatial distribution in the Istanbul housing market. Design/Methodology/Approach – The paper employs a multi-level approach within an event study framework to model changes in the pattern of house prices in Istanbul. The model allows us to isolate the effects of earthquake risk and explore the differential impact in different submarkets in two study periods - one before (2007) and one after (2012) recent earthquake activity in the Van region, which although in Eastern Turkey, served to alter the perceptions of risk through the wider geographic region. Findings – The analysis shows that their are variations in the size of price discounts in submarkets resulting from the differential influence of recent earthquake activity on perceived risk of damage. The model results show that the spatial impacts of these changes are not transmitted evenly across the study area. Rather it is clear that submarkets at the cheaper end of the market have proportionately larger negative impacts on real estate values. Practical implications – The methods introduced in this study can be used by real estate agents, valuers, and insurance companies to help them more accurately assess the likely impacts of changes in the perceived risk of earthquake activity (or other environmental events such as flooding) on the formation of house prices in different market segments. Originality/value – The paper represents an attempt to develop a novel extension of the standard use of hedonic models in event studies to investigate the impact of natural disasters on real estate values. The value of the approach is that it is able to better capture the granularity of the spatial effects of environmental events than the standard approach