The effect of induced earthquakes on the housing market
|Date:||16 May 2022|
In general, we are all aware of the consequences of the earthquakes that are induced by gas extraction. However, sometimes these consequences extend much further than we can think of, such as in the case of the house prices. Nicolás Durán dedicated his PhD research to investigating what the indirect and overlooked effects from earthquakes induced by gas extraction are on the housing market and successfully defended his thesis on May 12th. In this blog article, Durán reflects on the research process and discusses his findings.
Induced earthquakes affected homeowners in the province of Groningen through damages and value loss inflicted on their properties. Although this is a very direct and obvious effect, there were other, indirect impacts on homeowners in Groningen that have been overlooked by previous research. That is why Durán dedicated his research to finding out what those indirect and overlooked effects are on the housing market in Groningen.
The results suggest that, in particular, three indirect effects on house prices were important.
First, realtors use comparable houses to estimate the value of a house that will be put up for sale. Since some of these comparable houses had already been affected by earthquakes, realtors artificially transferred the effect onto houses that had not been affected yet.
Second, house prices were expected to keep on falling as receiving compensation was a very uncertain process and earthquakes were becoming more frequent and stronger, which meant more damages. This removed the incentives for homeowners to maintain their properties, which reduced house prices in the region further.
Finally, after a homeowner received compensation, their neighbors would be able to sell their houses at a higher price. This third finding also surprised Durán, as the typical approach had been to look at whether there was a stigma associated with compensations, but instead, Durán found exactly the opposite.
The period during which gas exploration and production company NAM did not acknowledge that the earthquakes were associated with gas extraction or that house damages were associated with earthquakes, produced massive uncertainty and distrust in the compensating scheme, which in turn inflicted further declines in house prices through lack of maintenance and investment in properties. Also, the area and starting point of the effects of earthquakes showing up in the housing market are larger and longer than previous research has suggested.
A new perspective
When these results are put into a bigger picture, this picture looks grimmer than initially thought. “Some countries, such as the Netherlands and many states in the U.S., in cases where houses are being damaged by earthquakes induced by gas extraction, allow people to claim for compensation, but put the burden of proof on the claimants themselves as well. That is, affected people seeking to be compensated need to show unequivocal evidence that earthquakes are a byproduct of gas extraction and that damages are inflicted by those earthquakes. However, gathering this evidence is costly, takes time, and during this period firms will typically stubbornly deny those connections. That makes people become belligerent towards and distrust these firms, eventually losing their "social license" to operate”, Durán explains.
In developed countries, firms that extract natural resources need tacit approval from the local peoples living in the region where those natural resources are located. Durán continues: “Looking at the current energy situation, the dependence on Russian gas, and the conflict of interests that this represents for any European nation, NAM losing the social license to operate in Groningen feels like a much larger cost than we thought it actually was”.
Passion and further ambitions
His reason for researching this specific topic was that he had always been interested in housing markets. “I even worked on the housing policy side of things in Uruguay, my home country, so when professor Elhorst was offering to supervise someone's PhD on the housing market and earthquakes, it was a no-brainer for me!”
Since he finished his dissertation, Durán has been involved in a project that looks at how indoor air quality affects primary school students in Limburg on their CITO tests. But that’s not all: “I am also planning to run a randomized control trial on this same question, but then to look at a larger array of air pollutants and how they affect coding quality of computer science students in University College London.” On top of that, he is also trying to publish most chapters of his thesis, extending those studies with more and new data.
You can find Durán's dissertation on UG’s website.