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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 adjascent 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 (particulalry the ceteris paribus assumption), but if gas remains at its current real price, we will see the shape of US cities change.
Demand gets steadily more elastic as the time horizon lengthens. Short term responses to expensive gas are small–a little less driving, taking the family’s Accord rather than the Suburban, etc. Medium term, the changes grow in scope–sell the Suburban and buy a Prius, finally figure out how to take commuter rail in to work. Actual shifts in housing preferences are going to be a long-term effect. Keep in mind, oil was well below $100 per barrel just a year ago. But if we see gas stay at or above $4 per gallon for longer than a year, households will begin taking bigger steps to permanently reduce their exposure to gasoline. And if we see those trends persist for a half decade or so, the real sea change in city structure will be on.
