This long-held economic theory on real-estate prices has been upended by COVID-19
The coronavirus pandemic has upended people’s assumptions about rents and home prices in major cities.
There’s a prominent economic theory — “the bid rent theory” — that suggests real-estate prices are highest around a city’s central business district and decrease the further you go away from that area.
But the COVID-19 crisis has seen a growing number of people moving to the suburbs. That’s caused home prices and rents in further-out areas to skyrocket, while price and rents have dropped in the urban cores of major cities like New York and San Francisco.
A new analysis from researchers at Columbia University and New York University examines the question of whether urban housing markets will snap back to their pre-pandemic states or be permanently changed by the health crisis.
The researchers argue that they can reach an early prediction of what the future holds “by comparing the changes in house prices — which are forward-looking — versus rents in city centers and the suburbs.”
Their prediction: A revival in urban rents. Their examination of real-estate data from Zillow showed that the declines in rents were more pronounced than the declines in home prices across urban ZIP codes, whereas the increases in rents and home prices in the suburbs were about equal. Their findings echoed other research that has shown the high demand for housing in the suburbs outstripped the supply of homes for sale, causing home prices to increase at a very fast pace.
With that in mind, the researchers projected that urban rent growth will exceed suburban rent growth by between 1.6% and 3.4% in 2021, based on experts’ prevailing expectations for how many workers will return to offices versus working remotely indefinitely. Should everything return to its pre-pandemic state, urban rents would be even more explosive, with a 7.5% increase in the average city.
And even if the pandemic represents a new normal and a permanent shift in people’s work lives, the researchers still expect urban rents to increase 0.5% faster than suburban rents going forward.
“Housing markets paint an optimistic picture of urban revival,” the researchers wrote in the working paper, which was distributed by the National Bureau of Economic Research.
Of course, not all cities have seen as large of a shift in real-estate demand caused by the pandemic. The study’s authors argue this is in large part a reflection of workers’ ability to do their jobs from home. In cities where more people can work remotely, the effects on home prices and rents were much more pronounced. A 10-percentage-point increase in the number of workers working from home led to a decline of between 0.7 and 1.4 percentage points to urban home price growth.
But the propensity of people to work from home had an even greater impact on rents than it did home prices, according to the analysis, suggesting that workers expect the trend to be a temporary one.
The number of remote workers wasn’t the only variable that determined changes to the cost of housing in and around major cities. Another important factor was how elastic the housing supply is, especially in the suburbs. In cities like Charlotte, Austin and San Antonio, the relatively flexible housing supply offset the impact of the shift to remote working. “In these areas, the relative ease of building means that greater real estate demand results in higher quantities, rather than higher prices,” the researchers wrote.
Other research has drawn similar conclusions to the new working paper, suggesting that demand for housing in urban areas remains quite healthy. An August report from Zillow Z, -2.80% ZG, -2.52% argued that the perceived urban exodus was overstated. “In all but a few cases, suburban markets and urban markets have seen similar changes in activity in recent months,” Zillow’s economists wrote, including roughly the same share of homes selling above their list price.
Separate research from Zillow also suggests that the decline in urban rents didn’t happen evenly within major metropolitan areas. Rent decreases were most prominent in expensive cities and high-income neighborhoods. Rents actually rose in the most affordable neighborhoods in many cities.