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Spillovers in Asset Prices: The Curious Case of Haunted Houses

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Utpal Bhattacharya, Hong Kong University of Science and Technology
Daisy Huang, Nanjing Audit University
Kasper Meisner Nielsen, Hong Kong University of Science and Technology

Published in: Economy & Finance
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Spillovers in Asset Prices: The Curious Case of Haunted Houses

  1. 1. Haunted Houses Definition of Haunted Houses from Wikipedia: “A haunted house is a house or other building often perceived as being inhabited by disembodied spirits of the deceased who may have been former residents or were familiar with the property.” Spillovers in Asset Prices: The Curious Case of Haunted Houses Utpal Bhattacharya, Hong Kong University of Science and Technology Daisy Huang, Nanjing Audit University Kasper Meisner Nielsen, Hong Kong University of Science and Technology
  2. 2. Research Questions 1) When a house becomes haunted, does its price drop? If yes, by how much? 2) Does the haunted house affect the price of neighboring houses? If yes, by how much? 3) If there is a negative spillover effect, why does that happen? Fire sales? Or something else?
  3. 3. Why Are These Research Questions Important to Answer? Externalities—the notion that the consequences of an economic activity can affect third parties—has been central to the neo-classical critique of market organization. While the theoretical modelling of externalities has made significant advancements, the same cannot be said about the empirical literature. Empirically it is difficult to convincingly conclude that one economic agent has an effect on an unrelated third party without completely ruling out that shocks to the local economy are affecting both. This is especially true for housing.
  4. 4. Why Hong Kong? 1) Homogenous apartments in a block in an estate all densely packed together – spillovers are easy to identify Details: Hong Kong’s population of 7.3 million lives in a small area that is less than 25% of its 1,106 km2 land Residential real estate mainly consists of units in high rise apartment blocks sharing common facilities inside an estate Market consists of many estates, but apartments inside each estate are fairly homogeneous
  5. 5. 5 Example: Dawning Views Fanling
  6. 6. 6 Example: Dawning Views
  7. 7. Why Hong Kong? 2) Locals take haunted houses very seriously. Sellers have to disclose.
  8. 8. Why Hong Kong? 3) There are many new haunted houses every year: large sample size
  9. 9. Why Hong Kong? 4) Unnatural death is an idiosyncratic negative shock that is unlikely to be correlated with local demand or supply economic shock affecting real estate prices. Even if it is correlated, within an estate, it is unlikely that local market conditions differentially affect haunted and non-haunted units / floors / blocks because of the close proximity.
  10. 10. 10 Data on HK Residential Real Estate  All private residential real estate transactions in Hong Kong between 2000 and 2015  Data include  Estate name and location  Property characteristics (size, age)  Transaction date and price  We harvest data on haunted houses from 4 real estate websites  HK Compass; Property HK; Squarefoot; Spacious  We focus on the 214 most liquid estates with more than 1,000 transactions (~65 per year) during our sample period  Corresponds to 50% of all private residential real estate transactions during our sample period
  11. 11. 11 Liquid Estates
  12. 12. 12 Descriptive Statistics (1)
  13. 13. 13 Descriptive Statistics (2)
  14. 14. 14 Effect of Haunted Houses on Prices
  15. 15. The Formal Research Design The dependent variable is the log price, yit, of apartment i in year-month t : ′ , (1) where captures apartment fixed effects, is a vector of year-month fixed effects, is a vector of apartment characteristics, and is an indicator for a haunted house due to an unnatural death occurring in the last k years before t. House characteristics that change over time in our sample are interior size and block age. The coefficient of interest in equation (1) is θ. A negative θ reveals the discount for being haunted, and if negative, the value of θ reveals the percentage discount.
  16. 16. 16 Empirical Specification  is an indicator for a haunted house due to an unnatural death occurring in the last k years before t  Unit  Floor  Block …  Estate  To avoid spurious correlation we exclude:  Affected unit when we estimate the effect on prices of the affected floor  Affected floor when we estimate the effect on prices of the affected block  Affected block when we estimate the effect on prices of the affected estate
  17. 17. 17 Spillover Effects of Haunted Houses Unit Floor Block Estate (1) (2) (3) (4) Haunted house -0.1970*** -0.0466*** -0.0271*** -0.0120*** (0.049) (0.0015) (0.0019) (0.0014) Size 0.0016*** 0.0014*** 0.0014*** 0.0014*** (0.0001) (0.0001) (0.0001) (0.0001) Age -0.0116*** -0.0171*** -0.0186*** -0.0213*** (0.0004) (0.0003) (0.0003) (0.0006) Unit fixed-effects Yes Yes Yes Yes Year-month fixed effects Yes Yes Yes Yes Adj. R-squared 0.988 0.976 0.976 0.975 N 151,237 323,586 324,025 199,516
  18. 18. -20% -5% -3% -1% Spillover Effects of Haunted Houses
  19. 19. Other Results 1)The ripple effect is strongest for murders.
  20. 20. Other Results 2) Price recovery is slow.
  21. 21. Other Results 3) The most important contribution of our paper is that, since we observe that negative spillovers exist even if the haunted house is not sold, we can isolate the quality channel from the fire sale channel. We find that the quality channel contributes significantly to spillovers in assets prices.
  22. 22. Decomposition; Quality Effect vs Fire Sales Effect Quantity Price Demand for normal house Demand for haunted house Supply if haunted house is not sold Supply if haunted house is sold Quality Effect Forced Sale Effect
  23. 23. External Validity: Is Hong Kong Special? Question 1: How prevalent worldwide is the belief in ghosts and the supernatural, or is Hong Kong unique? Answer: Belief in the supernatural is pervasive. We have data for 16 countries. In the United States, the percentage of people who believe in ghosts range, depending on the survey, from 37% to 45%. In the U.K., the percentage of people who believe in ghosts range, depending on the survey, from 40% to 52%. The University of Pennsylvania has a center for research on ghosts: the Penn Ghost Project. Question 2: Is Hong Kong special with regards to its aversion to haunted houses? Answer: A study of U.S. case law suggests that it is illegal for a seller to hide the fact that the property being sold is haunted. The website, www.diedinhouse.com, claims to be the first of its kind.
  24. 24. 24 Conclusion • We exploit the institutional setting in Hong Kong’s residential real estate market to identify the effect of spillovers on asset prices • We find a ripple effect of haunted houses on prices, as they drop by • 20% for affected units • 5% for units on the affected floor • 3% for units in the affected block • 1% for units in the affected estate • The ripple effect is strongest for murders; price recovery is slow • We show that negative spillovers exist even when the haunted house (i.e. unit) is not sold – documenting (for the first time) that asset quality contributes significantly to spillovers in asset prices
  25. 25. CONCLUSION

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