High-density living suffers a setback

But COVID-19 shift may not be long-lasting

Cities have been the centre of commerce and culture for millennia. Clustering similar and complementary activities offered efficiencies in productivity for businesses and more choice for workers as they sought jobs, restaurants and shops, as well schooling for their children. The denser the place, the more choices it offered, the more desirable it became.

But that was before COVID-19. Growing evidence suggests that the lure for a high-density living might have suffered a temporary blow as homebuyers set eyes on dwellings in the suburbs and beyond as a result of the pandemic. Social distancing requirements, it seems, have taken some shine off the denser employment hubs and the residential neighbourhoods surrounding them.

The Federal Reserve Bank of Dallas in August released a paper analyzing housing sales and prices in cities across the United States and concluded that “the pandemic has led to a greater decline in the demand for housing in neighbourhoods with high population density.”

Working from home (telework) has “diminished the need of living close to jobs,” the paper added. The decline in the value of accessing consumption amenities, such as restaurants, retailers and sports arenas, has further reduced the demand for central living.

The authors, Sitian Liu of Queen's University and Yichen Su of the Federal Reserve Bank of Dallas, highlighted two additional trends. First, high-priced neighbourhoods experienced a noticeable decline in demand during the pandemic. Second, the rate of recovery in high-density neighbourhoods was no better than other neighbourhoods when housing markets started bouncing back in June.

Pandemics have been the countervailing force to agglomeration forces in the past: Plagues and influenzas have dispersed populations and, in the worst cases, entire cities have been abandoned.

Fortunately, COVID19's impact to date has been limited. The authors, therefore, conclude that “the pandemic may have changed people's demand for density,” which is not the same as a call to “Get outta Dodge.”

The authors found that the decline in demand was more pronounced in neighbourhoods with a “greater share of telework-compatible jobs nearby.” The ability to substitute telework for commuting offers locational freedom to workers who often choose a residential location while being cognizant of the logistics of daily two-way commuting.

A critical question emerges from the study: How large is the pandemic's impact on shifting spatial preferences? We turn to September sales data from Toronto for an answer.

The Greater Toronto Area's housing market is generally differentiated between the City of Toronto, often referred to as the 416, its first telephone area code, and the surrounding suburbs, or the 905.

Detached housing sales in the 416 neighbourhoods increased by 28 per cent year-over-year in September, while sales in the 905 neighbourhoods increased by 64 per cent, more than twice the rate of the core Toronto neighbourhoods. Even sales for condominiums grew much higher in the 905 than the 416, which is traditionally known for abundant condominium supply.

The rate of increase in detached sales presented a different picture in September 2019, when the 416 neighbourhoods had a higher year-over-year increase than the 905 neighbourhoods.

But let's divide the GTA into regions to see whether the concentration of sales has declined or increased over time in different places.

A comparison of year-todate sales between September 2019 and September 2020 shows a small decline in Toronto's share of the GTA's sales in 2020. The same is also true for neighbouring Peel Region.

But the market share of the nearby Halton, York and Durham regions increased, providing support for the argument that the market share lost by central municipalities has been picked up by more remotely located suburbs.

However, the shift is relatively modest, preventing one from identifying it as a trend.

What has changed more noticeably is the increase in supply, captured by new listings relative to monthly sales, in the denser municipalities. The sales-to-newlisting ratio in the City of Toronto declined to 0.32 in September 2020 from 0.59 in September 2019. A similar decline was observed in Peel. By comparison, the ratio remained unchanged for the Halton and Durham regions.

The data for Toronto and the United States suggest consumer preferences are changing, but not by much. The development and widespread availability of a COVID-19 vaccine will likely strengthen agglomeration forces, which will benefit real estate in the urban core.

But that might take a while.