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Sunday, June 15, 2008

Gas Prices and the Urban Land Market

Richard Green:

$4 per gallon gasoline and the urban land market, by Richard Green: Over the past six years, the price of gasoline has risen about $2 per gallon. What does this mean for relative urban land prices?

Let's say the average household makes five one-way trips per day--for work, shopping, entertainment, etc. Let's also say that the average car gets 20 mpg in city driving. Each mile of distance to work, shopping, etc. is therefore now 50 cents per day per household more expensive than before. A household living immediately adjacent to work and shopping should then be willing to pay $5 per day more in rent than a household 10 miles away compared with six years ago, all else being equal. This becomes $150 per month, or $1800 per year. Assuming a five percent cap rate for owner occupied housing, this translates to $36,000 in relative change in value. Given that the median house price in the US is about $220k, this is kind of a big deal.

The assumptions here are pretty crude (particularly the ceteris paribus assumption), but if gas remains at its current real price, we will see the shape of US cities change.

On a larger scale, another potential reorganization is that producers may shift production closer to the markets where the goods are sold as transportation costs increase with energy prices (though see Brad Setser). If so, it's possible that higher energy costs could cause producers to shift production to Mexico, and this in turn could reduce the flow of illegal immigrants into the U.S.

Update: Follow-up from Richard Green here.

    Posted by on Sunday, June 15, 2008 at 01:08 AM in Economics, Oil | Permalink  TrackBack (0)  Comments (8)

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