Land subsidence: Environmental risk in housing markets in Mexico City

We study the costs of and the housing market response to subsidence– the sinking of land areas due to groundwater over-extraction– in Mexico City. We propose an equilibrium model of the housing market that features housing redevelopment in the face of an evolving environmental hazard that has both realized and expected future impacts to home quality. Our model highlights that while realizations of subsidence attract development by lowering the opportunity cost of re-building units, information frictions affecting the capitalization of future risk lead to an over-supply of housing in risky areas. Guided by model-derived estimating equations, we exploit quasi-random variation in sinking intensity to estimate the impact of both realized and future subsidence on home values and redevelopment. We find that realized subsidence imposes substantial costs, lowering prices by 1.5% on average. However, prices are unresponsive to measures of expected future sinking, and novel survey evidence suggests that information frictions affect the ability of homebuyers to capitalize predictable future risk. Consistent with model predictions, units that have experienced more sinking are more likely to be redeveloped, as these have lower opportunity cost of being re-built. Evaluating welfare using our parameter estimates implies that current rates of subsidence cost Mexico City a total of $33 billion USD, about $18 billion of which are due to information frictions that inefficiently increase the housing stock in the riskiest neighborhoods.

Biography

Lucy Hackett is an environmental economist interested in topics of economic development and urban and spatial economics. Her work spans the economics of natural resources and urban and housing economics, and she often brings together remote sensing and administrative data with tools from economic geography to answer questions that have a spatial dimension. Lucy is currently a PhD candidate in Agricultural and Resource Economics at UC Berkeley.