This paper uses the Hong Kong Severe Acute Respiratory Syndrome (Sars) epidemic in 2003 as a natural experiment to investigate how housing markets react to extreme events. I use a panel data set of large-scale housing complexes (called estates) and exploit the cross-sectional variation in the spread of Sars to measure the housing price movements associated with the epidemic. I contrast the impact on prices and sales of government announcements of SARS infections, news reports and the estimated estate-level infection rate. The average impact is 1-3 percent drop in price for the average Sars-affected housing complex, and an overall price fall of 1.6 percent for all estates. The implied economic value of life is between USD 121,000 and 1 million, which falls towards the lower end of estimates from non-extreme events. No evidence of overreaction in prices is found. An analysis on changes in transaction volume suggests that the absence of overreaction in housing prices is probably a result of high transaction costs and loss aversion.
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