The time-space economics of renting location assets

“The location of individuals determines their job opportunities, living amenities, and housing costs.”

According to Esteban Rossi-Hansberg and Adrien Bilal, an economics professor at Princeton University and PhD student, rather than buying accommodation, possibly to sell at a profit in a few years,  tenants can be thought of as investing in a location asset.  And like any asset, you need to ask “what are you getting out of it?”  According to Lifehacker,

Many people rent in places with a high cost of living for the job opportunities, good schools, cultural offerings, etc. (On a personal note… living in New York not only puts me at the epicenter of the media world, but in close proximity to any number of classes and workshops hosted by experts in every profession imaginable.)

“Buying more of the asset involves moving to better locations that cost more today but give better returns tomorrow, while selling the asset implies moving to cheaper locations with little opportunities,” the authors write.

CityLab breaks down the paper’s argument:

[W]hen you choose to move to a pricier and amenity-laden city, you’re transferring resources into the future—i.e., saving!—by establishing yourself near opportunities for higher pay and human capital, Rossi-Hansberg and Bilal argue. On the flipside, when you relocate to a community with a lower cost of living but fewer economic advantages, you’re pulling resources into the present that you might have gained in the future—i.e., borrowing.

I am an unusual case: I rent an apartment and I own a house so I see both sides of this equation.  Our critique of this comfortable view from the American Ivy League, parroted not too critically by a planning website, is that that not everyone can afford to “save” in this sense.  Also being forced to rent rather than buy is reflection of reduced choice and means in general.  It is more likely, in most North American cities, that renting places one amongst other disadvantaged people.  They may be artists on the cusp of a great break, or you might be a founding member of an activist group of the economically excluded, but they are unlikely to be successful entrepreneurs who are looking for workers. (Anecdotally, it is harder to create social bonds amongst residents in large rental apartment buildings, and easier to interact with neighbours on the street, possibly because children and pets add to the density of the web of social interactions and act as social lubricants between households).

Statistically it is much  more likely that tenants have less quality living environments, particularly in relation to childrens’ amenities, are more stressed by conflicts with landlords and unpredictable rent increases, and do not have a major asset that they can borrow against or lever as a means of responding to unexpected expenses and emergencies, opportunity costs such as tuition or even entrepreneurial initiatives.

The strategic question remains unanswered: how to make the situation work for rather than against you.  And, how would this argument fair in the case of suburban locations with long commutes, rural dwellers or urban squatters?  Turning this into an economic geography argument distracts us from other non-market decision factors such as quality of life, the ethnic makeup of the community or aesthetic factors that affect ones’ everyday sense of wellbeing.

This is a practical example of a debate that is both temporal and spatial.  It involves not only the geography of where one lives but of land speculation and rent trends into the future.  We call this elastic 4D field of rental rates, time, location and land price a topology because it combines space and time in more than 3D (non-Euclidean geometry) fluid space where these trends may move against each other to affect an outcome .

Rob Shields (University of Alberta)