Spillovers in Asset Prices: The Curious Case of Haunted Houses

What is it about?

Exploiting the unique institutional setting of Hong Kong’s real estate market, we uncover a curious ripple effect of haunted houses on the prices of nearby houses. Prices drop on average 20% for units that become haunted, 5% for units on the same floor, 3% for units in the same block, and 1% for units in the same estate. Our study makes two contributions. First, our results provide an estimate of a large negative spillover on asset prices caused by an idiosyncratic shock to the perceived quality of an asset. Second, since we observe that this ripple effect exists even if the haunted house is not sold, we can isolate the quality channel from the price pressure channel. We find that the quality channel contributes significantly to spillovers in asset prices.

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Why is it important?

Foreclosed homes have a negative effect on the neighborhood. Is it because they are sold at depressed prices (the fire-sale effect)? Is it because they affect the perceived quality of the neighborhood (quality effect)? Or both effects coexist? Or everyone in the neighborhood has a negative income shock, all house prices fall, and we erroneously think of this a spillover? This is the first paper which can cleanly answer all these questions using a sample that allows these answers.

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