Has SARS Infected the Property Market? Evidence from Hong Kong


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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