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Has SARS Infected the Property Market? Evidence from Hong Kong

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  • Grace Wong

    (Princeton University)

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    Abstract

    This paper uses the SARS epidemic as a natural experiment to provide new evidence on how housing markets react to adverse shocks, in terms of both prices and transaction volume. I employ a weekly panel data set on 44 large-scale housing complexes in Hong Kong. To isolate the impact of this unanticipated event from underlying time trends, I exploit cross-sectional variation in SARS infection risk due to pre-SARS building characteristics. The impact of SARS is measured by an estate-specific government SARS-list indicator, a count of newspaper stories connecting SARS to each estate, an estate-level SARS infection rate and a predicted SARS infection risk variable, in addition to a Hong Kong-wide-start-of-epidemic indicator. I find a price drop of 1-2 percent in response to SARS, which is consistent with the standard asset pricing model in the event of a severe but transitory averse shock; no signs of overreaction in terms of prices are found. I also find significant volume decreases of 20-40 percent, which were persistent after the SARS infection rate declined, suggesting that SARS led to both increases in search costs and ¡°fishing¡± behavior on the part of sellers. Volume fell most sharply in buildings that had experienced the least severe price drops in the preceding 7 years, which lends some support for a loss aversion model.

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    File URL: http://www.irs.princeton.edu/pubs/pdfs/488.pdf
    File Function: First version, 2004
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    Bibliographic Info

    Paper provided by Princeton University, Department of Economics, Industrial Relations Section. in its series Working Papers with number 11.

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    Date of creation: Apr 2004
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    Handle: RePEc:pri:indrel:11

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