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An unexpected death in an apartment can cause a 20% drop in the property’s sale price and further impact those on the same floor, in the same block, and on the same estate, according to HKUST’s Utpal Bhattacharya and colleagues. Focusing on Hong Kong’s real estate market, the authors show that such “haunted houses” can have a sustained negative impact on the value of neighboring properties.

“Spillovers in prices occur in many financial markets,” the authors note. “They are caused by an idiosyncratic shock that affects the price of just one asset, which in turn affects the price of other assets.” To explore this “ripple effect” in more detail, the authors focus on the property market. “Specifically,” they report, “we identify a negative psychological shock to the perceived quality of a house—a house being declared as ‘haunted’ due to a murder, suicide, or other unnatural death.”

The authors hypothesize that such a shock may affect local real estate value in two ways. The drop in perceived quality of a haunted house may discourage prospective buyers from purchasing homes nearby, causing a negative demand shock. However, there will be a positive supply shock if haunted house owners decide to sell their properties quickly, resulting in price pressure. “Both effects may cause the price of nearby houses to drop,” say the authors. They ask whether this price spillover “is driven by the fire sale of the haunted house (a supply shock) or lower perceived quality (a demand shock), or both.”

Hong Kong’s residential real estate market offers an ideal institutional setting. First, based on feng shui principles, local residents believe that an unnatural death in a house causes excess negative energy and thereby reduces the house’s value. As a result, say the researchers, “sellers have to disclose whether a house is haunted.” Second, the high density of Hong Kong housing means that price spillovers can significantly impact large numbers of properties.

The authors identify 1,032 haunted apartment units in Hong Kong. “A haunted unit drops in price by 19.9% after it becomes haunted,” they report. They also find a “curious ripple effect” on local property value. On average, units on the same floor as the haunted apartment drop in price by 9.7%. The average price of properties in the same block falls by 7.1%, while apartments in the same estate become 1.4% cheaper. Of all unnatural deaths, “murder has the most dramatic ripple effect.”

“Local economic shocks in Hong Kong cannot explain this highly granular ripple effect within an estate,” the authors tell us. Nor is the effect short-lived. “The prices of the haunted units do not seem to recover during our 16-year sample period.” What is the cause? “Since we observe that negative spillovers exist even if the haunted house is not sold,” say the authors, “we can isolate the demand shock channel from the supply shock (price pressure) channel.” They conclude that the price spillover effect is driven primarily by the demand shock caused by the drop in perceived quality of a haunted house.

The study provides unique insights into the impact of unnatural deaths on the Hong Kong property market. More broadly, the paper illustrates the dramatic spillover effects of such tragic events on local assets. “House price discounts due to unnatural deaths are relevant outside Hong Kong,” the researchers warn. “Few like to buy a house where a recent unnatural death occurred.”