Sunday, March 24, 2013

The Hamptons' Real Estate Market Adapts to Climate Change

The NY Times reports that coastal summer homes' elevation is capitalized into rental prices.   Perceived quality is reflected in prices.  Surprised?  I'm not.    Here is a quote:

" Waterfront properties,” she continued, “are always sought-after, but it’s probably safe to say that waterfront with elevation is becoming more important. Maybe that’s the new value that’s priceless.”
Note the business opportunity.  Those engineers and architects that can provide lower flood risk designs will be able to collect a large price premium.  Are you such a pessimist that you believe that nobody will figure out the magic of what Venice and the Dutch have figured out?  This is the small ball Climatopolis logic.

This Hamptons example is a nice case study of my Climatopolis logic.  Here are the steps for how capitalism protects us from climate change;

Step #1:  New information about new risks such as flooding is revealed (i.e Hurricane Sandy)
Step #2;  People update their subjective probability assessments
Step #3;   prices for risky assets decline and prices for safe assets (i.e homes less likely to flood) increase
Step #4;   product suppliers notice this new price gradient and this influences innovation investments and R&D patterns
Step #5;  some of these innovation efforts fail and some succeed
Step #6;   consumers now have a greater menu of adaptation products to choose from (i.e floating homes) because of Step #5
Step #7 overall adaptation is aided by Step #1 to Step #6 playing out

Note that this is dynamic capitalism at work.  Government can play a productive role in step #1 but it is the free market (not Government) leading the defense and it is the invisible hand playing the key co-ordinating role.