The housing market has surged due to remote work – no speculative bubble

The sudden shift to remote working amid COVID-19 has driven more than half of overall US house price growth during the pandemic — and as it becomes more integrated into our daily lives, it is likely that it will also continue to drive up house prices than inflation.

That’s according to new research released Monday by the Federal Reserve Bank of San Francisco, an economics letter titled “Remote Work and Housing Demand.”

“The transition to remote work due to the COVID-19 pandemic has been a key driver of the recent spike in housing prices,” wrote the letter’s authors, economists Augustus Kmetz, John Mondragon and Johannes Wieland. .

As US home prices rose at unprecedented rates – by 24% between November 2019 and November 2021 – the researchers wrote that the surge has “led to question whether price increases are sustained by fundamental factors, such as changing demand for remote work, or driven by speculation, partly fueled by fiscal stimulus and accommodative monetary policy.

One concern, they noted, is that house prices could “pose a risk to financial stability, like the bubble that preceded the Great Recession. In addition, faster-growing housing costs have contributed to inflation, which has reached its highest level since the 1980s, creating challenges for the fulfillment of the Federal Reserve’s price stability mandate.

While Federal Reserve researchers wrote in a June report that low borrowing rates amid the pandemic likely helped boost demand, analysis released Monday found that the shift to remote work ” accounts for more than half of overall price growth during the pandemic.”

“Our results suggest that the rise in house prices during the pandemic reflects a change in fundamentals rather than a speculative bubble,” they wrote. “This implies that the evolution of remote working may be an important determinant of future housing costs and inflation.”

Why has remote work impacted home prices?

The COVID-19 pandemic “has reshaped the way” Americans work, the economists wrote, noting that surveys show nearly a third of employees (30%) are still working from home part-time or full-time since last month, and “many employers and employees expect working from home to become a permanent fixture.

A work-from-home environment can increase demand for housing, as work that was previously done in an office environment “now takes up space and time at home,” they wrote.

“This has dramatically increased housing demand and is a key factor in why US housing prices increased 24% between November 2019 and November 2021.”

Their analysis shows that the shift to remote working can account for more than half of overall price increases, as well as rent spikes, and “this fundamental shift in demand for work-related housing may be important for future housing prices.” dwellings”.

For their analysis, the researchers studied the relationship between the share of jobs done remotely in 2020 compared to the shares of remote work before the pandemic. They found that remote work had increased during the pandemic.

The analysis also revealed that “the types of jobs in a city matter because many jobs are not feasible from home.”

Why have some cities become more expensive than others?

These factors are critical, the researchers wrote:

  • Technical professions: Cities with a concentration of tech jobs “should have more remote work opportunities than cities with primarily restaurant jobs.”
  • More affordable: Cities with “relatively cheaper and more available housing attract more remote work because people working from home want more space at home instead of using office space.”
  • Desirable weather: Cities with “relatively pleasant climates tend to attract employees who can work remotely.”

Areas with higher shares of remote work experienced “significantly higher house price growth than those with less remote work,” the analysis found. “The difference continued to widen until 2021.”

After controlling for migration patterns, the researchers found that “most of the effect of remote work on house prices stems from its direct effect on housing demand.”

“Cities more attractive to remote work tended to see more residents move in, driving up real estate prices, while cities less conducive to remote work shed residents and saw a slower growth in house prices,” the report said.

Their estimates show that 1 percentage point more remote working leads to an increase in house prices of around 0.9 percentage points, “smaller than initial estimates but still very significant”.

“This effect suggests that the nationwide increase in remote working has indeed caused an increase in demand for housing,” the researchers wrote.

Remote work increased by 16 percentage points, according to their data, implying that remote work caused house prices to increase by around 15% from November 2019 to November last year, “representing more than 60% of the overall increase in house prices”.

Leave a Comment