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Has SARS Infected the Property Market? Evidence from Hong Kong

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Author Info
Grace Wong (Princeton University)
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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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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Find related papers by JEL classification:
R0 - Urban, Rural, and Regional Economics - - General
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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  1. Kenneth Y. Chay and Michael Greenstone, 2005. "Does Air Quality Matter? Evidence from the Housing Market," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 376-424, April.
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  2. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  3. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May. [Downloadable!] (restricted)
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  4. John Krainer, 1999. "Real estate liquidity," Economic Review, Federal Reserve Bank of San Francisco, pages 14-26. [Downloadable!]
  5. Sven Rady, 1998. "Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints," FMG Discussion Papers dp296, Financial Markets Group. [Downloadable!] (restricted)
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  6. Terrance R. Skantz & Thomas H. Strickland, 1987. "House Prices and a Flood Event: An Empirical Investigation of Market Efficiency," Journal of Real Estate Research, American Real Estate Society, vol. 2(2), pages 75-83. [Downloadable!]
  7. Lisa Barrow & Cecilia Elena Rouse, 2002. "Using Market Valuation to Assess Public School Spending," NBER Working Papers 9054, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring. [Downloadable!] (restricted)
  9. Lynch, Allen K & Rasmussen, David W, 2001. "Measuring the Impact of Crime on House Prices," Applied Economics, Taylor and Francis Journals, vol. 33(15), pages 1981-89, December. [Downloadable!] (restricted)
  10. Gyourko, Joseph & Tracy, Joseph, 1991. "The Structure of Local Public Finance and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 774-806, August. [Downloadable!] (restricted)
  11. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  13. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, vol. 87(3), pages 255-69, June. [Downloadable!] (restricted)
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