Murders, suicides and accidental deaths lower the value of the affected units and nearby houses in Hong Kong and elsewhere, says Professor Utpal BHATTACHARYA, in an article published by the Economist.
Haunted houses in Hong Kong have a curious ripple effect on the prices of nearby houses, according to “Spillovers in Prices: The Curious Case of Haunted Houses”, a study by Professor Utpal BHATTACHARYA from HKUST, Daisy HUANG from the Southwestern University of Finance and Economics, and Kasper Meisner NIELSEN from the Copenhagen Business School and HKUST.
Prices drop on average 19% for units that become haunted, 9% for units on the same floor as the haunted house, 6% for units in the same block, and 1% for units in the same estate, the study says. A house is declared “haunted” if a murder, suicide or other unnatural death occurred within it, the authors note.
Spillovers in prices occur in many financial markets, and are caused by an idiosyncratic shock that affects the price of just one asset, which in turn affects the price of other assets. The study identifies an idiosyncratic negative shock to the perceived quality of a house – a house being declared “haunted” – which may cause a negative demand shock, a positive supply shock, or both.
There will be a negative demand shock if the lower perceived quality makes prospective buyers reluctant to buy nearby houses, and there will be a positive supply shock if haunted house owners decide to sell their houses fast, resulting in price pressure. Both effects may cause the price of nearby houses to drop. This study is the first study that attempts to decompose the price drop into these effects. They find that the price drop is mostly caused by the demand effect.
Hongkongers are wary of haunted houses
In Hong Kong, residents are wary of haunted houses, and sellers must disclose whether a house is haunted. The psychological component of the value of a house, given the beliefs of most Hongkongers, is related to the principles of Feng Shui. An unnatural death, it is believed, causes excess negative energy, and impairs the value of a house. As a result, real-estate companies maintain databases of haunted houses compiled from local press reports which cover these tragic events.
Suicides are the major reason that a house becomes haunted, making up 88% of the study’s sample group. Accidents, which make up 7% of the sample, are the second most common cause. Murder accounts for only 2% of the sample.
The ripple effect
To examine the effect of haunted houses on prices, the authors followed a standard approach in real estate economics and regressed the logarithm of the price on time-varying unit characteristics, unit fixed-effects, and year-month fixed effects.
The authors found that a haunted unit drops in price by 19% after it becomes haunted; the units on the affected floor drop in price by 8.9%; the units in floors 1 to 3 floors above or below the affected floor drop in price by 8.3%; the units in floors 4 to 6 floors above or below the affected floor drop in price by 7.5%; the units in the affected block drop in price by 6.2%; the units in the block that neighbors the haunted block drop in price by 3.3%; and the units in the affected estate drop in price by 1.3%.
Murder has the most adverse effect on the price of a unit, and a house price drops by 34.5% if a murder has been committed within it. Murder also has the most negative adverse effect on neighboring house prices. The units on the affected floor drop in price by 19.2%, the units in the affected block drop in price by 10.2%, and units in the affected estate drop in price by 4.7%.
Price drops are not temporary
Such price drops are not temporary for the affected units, floors, or blocks. They do not recover even after three years. Indeed, prices of haunted units do not seem to recover at all, and did not recover during the 16-year sample period of the study. The prices of the haunted house’s neighbors on the same floor did recover, albeit very slowly. But the affected block and the affected estate may experience further discounts as time goes by.
How relevant are the research findings to other parts of the world? The study found anecdotal evidence of a 25% discount on haunted houses in Australia, the UK, and the US in a sample of 101 newspaper articles from those countries. A New York Times article noted the stigma associated with a haunted house can result in a 25% lower price.
