A Novel Solution to Housing Affordability— Work From Home

Urban economists explain why cities exist by the agglomeration economies, that is people and firms prefer agglomerating in the city centers, where supply chains, job opportunities and amenities are better. However, it can also result in negative externalities such as traffic congestion, unaffordable housing, high living costs and air pollution, etc.

These intrinsic conflicts between agglomeration economies and negative externalities have made cities difficult to thrive. Glaeser (2007) even argue that residential location choice is simply a trade-off among the four preferences in the following utility maximization formula:

“(1) Income + Amenities - Housing Costs - Transportation Costs” (p.5)

The classic Alonso-Muth-Mills model founded the cornerstone of urban economics by the land price gradient and commuting cost gradient from city center to the peripheral. It predicts that “the price of land must fall with distance just enough to compensate commuters for longer commutes.” (p.7)

For example, Glaeser, Kahn & Rappaport (2008) find that poor households are found to live closer to the city centers, where housing cost and living cost are much higher. Yet they conclude that cities do not make people poor, but rather that city centers attract the poor, and “the urbanization of poverty comes mainly from better access to public transportation in central cities.” (p.1)

However, the COVID-19 pandemic speeds up the viability and commonality of Work-From-Home (WFH), Study at Home, e-shopping, and all kinds of online services. Transportation cost is no longer a concern if people can WFH. As the pandemic is still lingering and even rebounding in many big cities, many governments and businesspersons start realizing that the post-pandemic economy would not be the same as before. They are making long-term adaptation plans for the cities and their businesses. In fact, some large firms in the US cities decide to allow staff to WFH permanently, even after the pandemic. (Bloomberg, 2020; CNN, 2020; The Economist, 2020) Many people are fleeing from city centers to rural areas to save the rental costs when they can WFH and shop online.

Kelly and Lerman (2020) of the Washington Post tell the stories that the pandemic is making people reconsider city living, and many Americans are now making big moves to less-populated areas.

COVID-19 is re-shaping our Urban Future! Even though it may be negative in many aspects, it can be an opportunity to solve the problem of housing unaffordability. When more people can WFH and study at home, they can choose to live at the rural areas or areas with lower housing rents and prices. The demand of housing in the city centers or at good accessibility locations would fall. It helps make housing more affordable by flattening the house price gradient from the city center.

For example, Grimes & Liang (2007) find in Auckland that “land within the CBD was valued at just over twice the rate of land 5 km distant, five times the rate of land 25 km distant, and almost thirteen times the rate of land 50 km distant” (p.19 and see Figure 1)

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Figure 1 Impact of Distance from CBD of Auckland on Real Land Values (Grimes & Liang, 2007)

WFH may be a novel solution to the housing unaffordability problem in many cities. When people do not have to agglomerate at the city centers to trade off for higher income, lower commuting costs and time, it certainly reduces the demand of housing in the city centers, but increases the demand in other rural areas or city peripheral. The average price of the whole territory may be the same, but the price gradient would be flattened. This prediction is in line with one of my papers on the two-workplace location choice model. (Yiu, 2008)

Furthermore, since WFH can reduce commuting costs and time. It does not only cut carbon dioxide emission, but it also provides more time for other activities. When WFH and e-shopping become more common, the demand of office space and retail shops in the city centers would fall. It helps make office and retail rents more reasonable, then hopefully it would rejuvenate the urban economy by saving the living costs of households and the operational costs of businesses.

Yet, people may be pessimistic that many jobs cannot be WFH. They argue that many low-income households are engaged in manufacturing jobs and goods delivery jobs which require physical labor force and cannot be carried out at home. However, I think it is technologically viable but it requires more bold attempts. For example, goods delivery can nowadays be carried out by driverless trucks or Prime Air drones (Amazon, 2016), it can be controlled at home!

The post-pandemic economy would certainly be very different from that before. How the pandemic is changing our world and how can we adapt it to our maximum benefits is an urgent question to answer.

WSJ (2020) discusses “How the Pandemic Is Changing Our Commute?” The video shows how the FMs of the rails in various cities try to keep the transport systems safe as well as providing efficient services. It also discusses the expansion of sidewalks and bike lanes, etc. CNBC (2020) tries to explore how future air travel would look like.

If you have any good ideas on this question, please share with us in the response box below.

Amazon (2016) First Prime Air Delivery, Dec. https://m.media-amazon.com/images/G/01/acs/test/jr/121216/PrimeAirVideo._CB509077587_.mp4

Bloomberg Markets and Finance (2020) The Future of Working From Home, Youtube, Sep 15. https://youtu.be/huQy09FdFuI

CNBC (2020) What Does the Future of Air Travel Look Like? Youtube, Jul 4. https://youtu.be/xLR25jvH22E

CNN Business (2020) Will cities survive permanent work from home? Youtube, Sep 1. https://youtu.be/Q_UOzhtaNCM

Glaeser, E.L. (2007) The Economics Approach to Cities, NBER Working Paper Series, WP#13696, National Bureau of Economic Research, Dec. https://www.nber.org/papers/w13696.pdf

Glaeser, Edward L., Matthew E. Kahn, and Jordan Rappaport (2008) Why do the poor live in cities? The role of public transportation. Journal of Urban Economics, 63(1), 1–24. https://www.sciencedirect.com/science/article/pii/S0094119007000046

Grimes, A. & Liang, Y. (2007) Spatial Determinants of Land Prices in Auckland: Does the Metropolitan Urban Limit Have an Effect? Motu Working Paper 07–09, Motu Economic and Public Policy Research, Aug. http://motu-www.motu.org.nz/wpapers/07_09.pdf

Kelly, H. and Lerman, R. (2020) The pandemic is making people reconsider city living, trading traffic for chickens, The Washington Post, June 2. https://www.washingtonpost.com/technology/2020/06/01/city-relocate-pandemic/

The Economist (2020) Covid-19: is working from home really the new normal? Youtube, June 25. https://www.youtube.com/watch?v=MxDVucUZCnc&feature=youtu.be

WSJ (2020) How the Pandemic Is Changing Our Commute, Youtube, Jun 29.

Yiu, C.Y. (2008) Housing Price Gradient Changes Between Macau and Hong Kong: A Neighboring City Effect, International Journal of Housing Markets and Analysis, 1(2), 196–206. https://www.emerald.com/insight/content/doi/10.1108/17538270810877808/full/html

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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