The Local Cost of Terror: Effects of the Second Palestinian Intifada on Jerusalem House Prices

Abstract

This research presents new findings on the economic cost of terror. To that end, we provide evidence of changes in house prices in the Gilo neighborhood of Jerusalem in the wake of the 2000 Second Palestinian Intifada. During that period, Gilo suffered from sporadic and ongoing gunfire from the neighboring Palestinian village of Beit Jala. Our sample includes 555 housing transactions from the Gilo neighborhood of Jerusalem over the 1997-2008 period. Results of VAR estimation indicate that shooting events result in a lagged 12 percent reduction in Gilo house values. However, as evidenced in the impulse response functions, those effects are largely reversed within 18 months of the terror event. Difference-in-difference analysis of the micro-data permits further assessment of the neighborhood spatial incidence of terror. Results indicate an average quality-adjusted house price decline of about 10 percent among “frontline” relative to “non-frontline” dwellings in Gilo in the aftermath of the outbreak of hostilities; moreover, much of that effect persisted some five years subsequent to the cessation of violence. Research findings suggest substantial residential property value effects of terrorism as incurred by households living in conflict areas. Those same households – like many others – would be the direct beneficiaries of conflict resolution.

Keywords: Terror, House Prices, Palestinian-Israeli Conflict

JEL Classification: R11, R21, R23