Government response coordinated market participants and reduced uncertainty.

The COVID pandemic has sparked a debate on how to balance health outcomes against economic outcomes. The assumption has largely been that government action protects lives, but harms the economy.

In a new study, we use daily transaction and auction data from the Norwegian housing market to find out how market participants reacted to the spreading news of Covid-19 before and after the lock-down on March 12, and after the re-opening on April 20. Our results suggest that concerns about the negative economic effects of government action may have been exaggerated.

Using a pricing model to construct counterfactual price developments, we document that half the COVID-related price fall occurred before lock-down. In other words, market participants reacted voluntarily to news of the pandemic well before government action forced them to do so.

We also observe a decline in transaction volumes and seller confidence before lockdown. At the same time, bidders became more likely to extend aggressive bids. This is consistent with voluntary behavioral change on the part of both sellers and buyers. Social mobility data from Google and business cycle data from the Financial News Index (our unique daily business cycle index derived from news media coverage) back up the findings.

Lockdown was at least in part a response to public opinion

In the debate about how COVID lock-downs harm the economy, it is easy to underestimate the role of self-enforced behavioral changes. When the state broadcaster NRK interviewed Prime Minister Erna Solberg on 26 May about the lockdown, she framed it as a response to public opinion:

“There was a growing fear in the population about the new virus. Many responded by taking their kids out of kindergarten and school… We thought it was important to take control over the situation and establish some common rules.”

This indicates government action may actually have helped to coordinate action and reduce the uncertainty among market participants. As such it may have helped, rather than harmed the economy.

Although our analysis focuses on the housing market, our findings are useful for other markets both in Norway and abroad. The values of homes affect the wealth of homeowners, which in turn affects general spending levels. Likewise, house prices tell us something about the labor market because people often have to move house in order to change jobs.

Moreover, even though the Norwegian housing market is small and peripheral in the world economy, the timeline of COVID spread and lockdown in Norway was similar to much of Western Europe. The Norwegian housing market may therefore serve as a laboratory for the study of lockdown and COVID effects.

You can read the entire study here. It was co-authored with André K. Anundsen, Bjørnar Karlsen Kivedal and Erling Røed Larsen of OsloMet.

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