Housing Market Response to 2012 Northern Italy Earthquake: The role of house quality and changing risk perception

This paper examines the housing market response to Northern Italy earthquake in May 2012. Available literature provides evidence of a drop in the average price of houses after a disaster mainly due to i) underestimation by households of disaster risk in area where its occurrence is low or ii) overreaction because of a higher risk perception triggered by the unforeseen extreme event. Here, we provide evidence that overreaction can play a significant role. We use the Northern Italy earthquake as an experiment that permits to estimate the response of housing value to the extreme event by means of a diff-in-diff models. Differently from other papers, we directly carry out the assessment of the damage earthquake scenario, by using macroseismic methods to evaluate the physical damage level of the Northern Italy earthquake. In this way we are able to compare different damage scenarios and providing information on subjective perception of risk. Moreover, to our knowledge, this is the first work providing evidence that the quality of the houses in relation to the 'resistance to the tremor' might also play a relevant role for subjective risk assessment.