Gas Prices and Housing Locations
by MaxPower
I have read in a couple different articles, here, here and here about how with high gas prices, housing prices in the suburbs are on the way down and inner city housing prices are on the way up. That makes logical sense - people will see how much they are spending on gas and decide to move closer to their place of work. However, for a number of reasons I think this is complete sensationalist journalistic BS and if that ever does come to pass it will be many years down the road at gas prices much higher then they are today. Here is my rationale:
1) Gas demand is extremely inelastic. My undergrad economics thesis was an econometric examination of this concept. I looked at the number of cars on the road in Alberta going back 30 years, gasoline consumption and a number of other factors such as availability of public transit to determine elasticity. At the time, gas prices were around $0.60/litre and I predicted that prices would need to at least double to get any sort of demand reaction whatsoever. With prices at ~$1.30/litre right now and only the start of demand destruction (i.e. people buying more efficient cars) I think that bears out my results. So if we needed gas prices to double in just under a decade to change people's gas consumption habits, how long and how high do you think gas prices will need to be to impact someone's decision on where to purchase a home, when that purchase is likely 10x the size of a car purchase? My guess, without doing any econometric modeling is probably 10+ years with at least another doubling in gas prices.
2) Transportation is only one consideration when buying a house/condo. Others including size, price, access to services, neighbourhood amenities are all likely higher ranked in most people's preferences. As well, transportation could mean a bunch of different things, location to LRT/bus routes, location to schools, location to highways, not all determined by gas demand. Most importantly TIME of commute is much more important than cost. When people make the switch from driving to transit they often talk about how much they will save, but the unwritten assumption is that they will likely save time or be at best be equal. No one is going to look to save $100/month for a doubled commute time.
3) People work in different places. Lots of people work downtown, but lots of people work elsewhere. To the extent that someone doesn't work downtown then the idea of moving to the "inner city" to save gas is a fallacy. For Calgary, approximately 30% of all people work in the area defined as "downtown" which includes the Beltline. For those other 70%, living outside the inner city may have more transportation-based merit.
4) If gas prices do move up enough to change people's living habits we should expect other technologies to impact decisions on where to live as well. To counter the argument that everyone will move back into the inner city to save on gas, I suggest if gas prices double again, there will likely be a larger push to telecommute. If, that is indeed the case, demand will likely be in the suburban and even quasi-country areas. Not all people will do that obviously, but other technologies could give the people the ability to leave the city completely.
5) Hard economic realities. Let us assume you have $600,000 to spend on either a new house in a suburb or a new 2 bedroom condo downtown. We will ignore all other decisions on whether you want to live in a condo or a house (space, location, lifestyle) and simply concentrate on a concern with gasoline use. The average new build home price for Calgary in May 08 was $570,000 . The average person in Calgary drives 18,000km per year according to the CMHC. So lets assume you have one car, and you would have that car in either case (i.e moving downtown wouldn't cause you to get rid of the car completely). When I lived in a condo downtown my average km driven fell to about 8,000 km/year, so lets say a commuter from the far flung burbs drives 20,000 km/year or 12,000 km more than a downtown dweller. At an average of 9 liters/100km for fuel (a small crossover or large sedan) the downtown dweller will need 720 litres of fuel vs. the suburban drivers demand of 1,800 litres, a difference of 1,080 litres. If you estimate the average price of gas to be $1.30, that is a difference of $1,404 per year or $117/month. Lets assume you will spend 10 years in the new house/condo. The suburban dweller would over 10 years spend $14,040 (not adjusted for inflation) more than the downtown dweller on gasoline. That is only 2.3% of the overall house price.
While most people won't go through the exact calculations I just performed when deciding to buy a house, they all inherently know how much money they spent on gas and at 2.3% it just isn't a big enough deal to make them consider it. Even at ~5% (i.e. $2.60/litre), I'd argue it isn't top 3 for deciding where to live. As an additional point, car insurance for downtown dwellers is more expensive as Canadian insurance quotes are driven off of your postal code. My insurance went up 75% when I moved downtown (and had my car in a secured, heated, underground parking lot).
The BIG money is to be saved by moving within walking/biking distance of your work and all activities so that you can get rid of the car completely and save significant cash on insurance and maintenance as well as gasoline demand. But this is simply not realistic for the vast majority of people. Journalists consistently over-emphasize how important gas prices are to individual's decision making process and this whole idea that people will move downtown to avoid gas demand is just another example to go along with people who think they can run their car on water.