Working Paper: NBER ID: w19515
Authors: Guoying Deng; Li Gan; Manuel A. Hernandez
Abstract: This paper uses the 2008 Wenchuan earthquake in China as a natural experiment to examine how the housing market reacted to this unforeseen, extreme event. We use a unique transaction dataset for new (under construction) apartment units to analyze the pricing behavior of units in lower versus upper floors before and after the earthquake. We observe that average housing prices decreased after the tremor. However, the relative price of low to high floor units, particularly units located in the first and second floor, considerably increased for several months after the earthquake. This relative pricing pattern is in line with a higher risk perception and fear, triggered after the tremor, of living in upper floors. Additional robustness checks support the apparent overreaction of individuals to a dramatic event.
Keywords: housing market; Wenchuan earthquake; overreaction; risk perception; hedonic pricing
JEL Codes: Q54; R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| floor level (Y20) | perceived earthquake risk (D80) |
| Wenchuan earthquake (H84) | average housing prices (R31) |
| Wenchuan earthquake (H84) | relative price of lower floor units (R31) |
| perceived earthquake risk (D80) | relative price of upper floor units (R31) |
| relative price of lower floor units (R31) | relative price differences of lower to upper floor units (R31) |
| relative price differences of lower to upper floor units (R31) | return to pre-earthquake levels (E32) |