Coastal cities face increasing flood risks due to climate change. Physical infrastructure, such as levees, are commonly used to manage flood hazards. However, typical planning practices often neglect human-system responses to built infrastructure, such as the so-called “levee effect,” in which individuals are more likely to move into or invest in a floodplain after the construction of a levee. It is still unclear under what system conditions levee construction result in worsened damages during extreme flood events. In this study, we examine how climatological, structural, and decision-making uncertainties contribute to the occurrence and strength of the levee effect in coastal environments. We explore the possible levee effect by simulating household responses to dynamic flood events, first in a synthetic floodplain environment and finally under a proposed levee construction project in Baltimore, Maryland. We find that flood impacts from extreme events post-levee construction are highly sensitive to factors related to household flood risk perception and levee breaching. These results suggest that minimizing uncertainty around human response to flooding could reduce future flood risk more so than improving the accuracy of flood hazard projections. By selecting an assortment of floodplain interventions that minimizes structural failure and maintains residents' awareness of flood risks, city officials may be able to simultaneously promote sustainable urban development and improve coastal resilience.