Flattening the Curve: Pandemic-induced Revaluation of Urban Real Estate

Arpit Gupta
By Arpit Gupta, Jonas Peeters, Vrinda Mittal and Stijn Van Nieuwerburgh
Over the last few decades, economic activity has been concentrated in the urban centres of a small handful of ‘superstar cities’ (Gyourko et al. 2013). The inelasticity of the housing stock in these urban centres has meant that a large fraction of the benefits from economic growth in the last few decades have accrued to property owners rather than improving the disposable income of local workers (Hornbeck and Moretti 2020, Hsieh and Moretti 2019).

We document how these urban agglomeration trends have shifted in the wake of the COVID-19 pandemic. The social and economic disruption wrought by the pandemic led to large-scale migration (Coven et al. 2020), facilitated by increased work-from-home policies (Bartik et al. 2020, Bloom 2020), reduced commuting (Barrero et al. 2020), and shutdowns of city amenities. These changes raised the premium for housing characteristics found in suburbs and outlying areas, such as increased space and lower density (Bloom and Ramani 2021). 

Empirical results
We study how the so-called bid-rent function has changed from before the pandemic to the present. The bid-rent function is the relationship between house prices or rents on the one hand, and distance from the city centre on the other hand. The bid-rent function for prices and rents is downward sloping. Prices and rents are highest in the city centre – reflecting land scarcity (and difficulty developing for regulatory reasons), urban amenities, proximity to work, and agglomeration effects – and fall the farther one moves away from the centre. We measure this gradient as the elasticity of prices and rents with respect to distance from the city centre and refer to it as the price gradient or rent gradient. 

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Arpit Gupta is Assistant Professor of Finance.