Pandemic preferences – the case of housing

Cross-post from Substack.

COVID was a pretty big life shock for all of us – with uncertainty about the virus, and the magnitude of government interventions associated with it, leading people to change their way of doing things across a number of dimensions of their life.

One of the clearest changes was the decision of where to live. In a fascinating note from e61’s Aaron Wong from mid-2023 he shows people did change their behaviour regarding renting property following COVID – and that this shows up clearly in the rental premium paid for living in cities between 2020 and 2022.

The decision on where to live: Rental premiums

The decision about where to live depends on a number of factors. Where are the jobs? Where is my job? Where is a good school? How good is public transport? Am I near a nice park? Where can I get a coffee? How can I see my friends on the weekend?

The varying amenities associated with a location mean that different individuals sort into very different locations. However, the bundle of amenities available near city centres tends to be of higher value than those that are a long way away for the average person. This is a logical result given that, for most, it will tend to be closer to work, and provides more opportunities to hang out with friends and go shopping.

This is what Aaron finds – but something changed in mid-2020!

After COVID kicked off the discount associated with living further away from the a capital city/centre of a city dropped.

So why would the relative value of living in the city decline? This could come from the value of being distant rising (i.e. if I’m away from everyone I’m less likely to get COVID!) or the value of being central falling (i.e. I’m stuck in my house so I can’t make use of restaurants anymore).

Examples of this are:

  1. Working from home (travel time): With working from home required, the benefit of lower travel time is gone – removing a major benefit of central living.
  2. Working from home (house size): Central city properties tend to be smaller than properties available further away – and it is nice to have an extra room when working from home. [Note: The differences shown above control for property characteristics like the number of rooms]
  3. Working from home (internet quality): Internet quality is very variable in Australia – but is generally a lot better in cities than in regional areas. This will have increased the relative value of living centrally.
  4. Same stuff as above – but about enjoying your leisure time!
  5. Fear of COVID and population density: The centre of the city has more people in it – more people, more COVID. Plus one to living regionally.
  6. Freedom during lockdowns: Lockdowns tended to be more severe in central city areas than in regional areas. Another relative benefit in the regions.
  7. Availability of groceries: COVID was a period where supermarket deliveries picked up. In central cities this was very available – but was oversubscribed meaning that you would spend time lined up at supermarkets. In regional areas it was variable. It is unclear if the relative value changed on this margin.

Is this a permanent change?

Intuitively, the premium is likely to have started returning over 2023/24 as COVID has moved into the past. But if there is a step-change in working from home the city premium may be permanently gone.

Is there anything in the analysis that allows us to work out what is going on? Well this is where the appendix has our back.

House prices reflect the expected rental/housing service yield associated with a property over time. If the change in the rental premium was expected to be permanent then we would expect to see relative house prices also change.

But they haven’t really (apart from a small tick up for fairly distant properties – but not to the same degree as the rent change).

This suggests that the current reduction in the regional rent discount is expected to be a temporary phenomenon – and we should see the gap between city and regional rents reopen in the coming years.

Does this mean that households don’t expect a long-term “Nike Swosh” in working from home (contrary to Nicholas Bloom’s expectations)? Maybe, but that is a topic for another time.

1 reply
  1. Anonymous
    Anonymous says:

    Great article. This made me think of Simak’s City short stories. Particularly the first story in the series, where nuclear power, personal air travel, and instant long-distance communication killed off cities. Instead everyone lives in the equivalent of the lifestyle block.

    Coming from the horrors of World War Two, Simak believed the city was an anachronism that humanity would be better without. He believed poor communication and travel were the only reasons cities persisted. Now we don’t have personal air travel yet, but communication is certainly lightyears ahead now.

    Yet cities have persisted. It will be interesting to see if there is a step change here or whether COVID was just a blip.

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