The rise of remote working during the pandemic has made cities seem less attractive. The draw of urban living is much reduced when leisure facilities are closed and the virus is spreading easily. For people stuck at home all the time, a house with a garden beats living in a tightly-packed apartment.
But more space or bigger gardens are options often unavailable or unaffordable, forcing a move out of the city to places where property is cheaper.
But while some people are escaping from cities, the bigger impact is from people not moving to them. US data show that hundreds of thousands of people who would have moved into an urban neighbourhood in a typical year were unwilling or unable to do so in 2020 because of COVID-19 concerns, remote working, or because leisure-activity closures make cities unattractive.
That affects the relationship between house prices and rents. People moving to a city often rent initially, not least to get to know the area properly and to have time to adjust. People moving out to cheaper properties often buy.
And many students, or graduates starting jobs, are working online and opting to stay longer at their parents’ homes. But this age group makes up a disproportionate number of renters.
Meanwhile leisure and hospitality workers - typically lower income and concentrated in urban areas - have been hit hardest by the pandemic, squeezing their ability to afford rental accommodation.
Low workers’ incomes have fallen further than others. This partly explains why rents have seen significant disinflationary pressure, even as house prices continued to rise.
Globally, would-be home buyers have benefitted from low interest rates and little impact on incomes if they maintained employment. So, almost universally across the world, house prices have risen in the pandemic.
However, urban rents have fallen. In all major US metro areas, apartment rental prices declined in the year to January - most by more than 5 per cent, but the fall in San Francisco has exceeded 15 per cent. Greater London rents are down about 8 per cent despite rising in the rest of the UK. Berlin and Singapore fell too while Sydney and Melbourne have seen declines as rental vacancy rates rose.
The story of urban vs rural rents appears to be evident wherever data are available across the developed world.
Given that remote working seems set to persist, it may be hard for cities (particularly in the developed world) to regain their appeal. The pandemic has accelerated a shift towards smaller urban areas rather than large cities as people start to value larger homes and access to green space.
The regular flow of young people into developed-market cities may not return to pre-pandemic levels.
But the supply of rental properties may even be rising. US apartment construction cooled in 2020 but is still increasing strongly. And long lead-times mean housing supply may be increasing worldwide when demand is drying up.
Urbanisation trends could affect headline inflation figures during 2021 and 2022 in countries where rents are a large component of indices. In the US, rents are the biggest share of the inflation basket - more than 30 per cent.
First published 24 February 2021.
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