Cities continue to grow faster than other areas in OECD countries, attracting more migrants and young people keen to start their careers. Pre-Covid, 30 million people (nearly 3% of the population) changed their region of residence each year. More than half of these movers were young people aged 15-29. But while density creates opportunities, it also comes at a cost. Highly productive companies and workers are in fierce competition for urban space.
The trade-off: productivity vs affordability
Housing has become increasingly expensive over the last decade, especially in large metropolitan areas which were already the least affordable. In half of the OECD countries with available data, capital regions – which are often the most productive places – have the highest house prices. Many of the most productive cities also have stark interpersonal income inequalities.
While these places have the highest potential to provide well-paying jobs, according to the OECD’s latest edition of Regions & Cities at a Glance (2022), “a lack of affordable housing can also limit economic opportunities linked to residential mobility and contribute to labour shortages”.
Housing (un)affordability is closely linked to productivity. Workers gravitate to cities and densely populated areas for better employment opportunities and a variety of attractive amenities. Typically, successful firms attract other highly-productive firms and highly skilled workers co-locate in well-performing areas despite congestion (e.g. commuting) and high costs of space. Although these productivity advantages boost wages, they also create price pressures. Housing is more affected than other spending categories because it depends on land and locations that are in fixed supply.
How do different OECD regions fare?
Brussels, Copenhagen and London all have high productivity coupled with low affordability. These are places where the average household spends 20-30% of disposable income on housing, including rent and maintenance. Yet this is not the case in Austria, where the highly productive capital region of Vienna has relatively high housing costs but Salzburg is nearly as productive and much more affordable. Some regions of Canada and Australia also manage to combine high productivity and low housing costs.
Housing affordability varies widely across regions – particularly in the UK and Germany (% of disposable income)
Note: Cost of housing in OECD large regions (TL2) or small regions (TL3) when available, 2020.
Source: OECD Regions and Cities at a Glance 2022 https://www.oecd.org/publications/oecd-regions-and-cities-at-a-glance-26173212.htm
Residents of productive regions tend to pay more for less space, particularly in Asia and Europe where cities are more compact. For example, households have only 1½ rooms per capita, on average in capital regions of Belgium, France, Korea and Sweden— less than most other regions of these countries. Households in the capital regions of Australia, Canada, New Zealand and the US fare better with an average of 2 to 2½ rooms per capita.
This pattern is consistent with the larger built-up areas of North American cities compared to European ones. In South America, households in capital regions have fewer than 1½ rooms per capita, yet these households have more rooms than many other regions of Chile, Colombia, Costa Rica and Mexico, likely due to their higher (relative) incomes.
Built-up area and building height in cities
Source: OECD Regions & Cities at a Glance, 2022.
In many expensive cities, people pay more for accommodation while also living in smaller homes and flats. Thus when the COVID-19 pandemic started, it seemed possible that remote workers would move away from metropolitan areas and affordability would improve.
Remote work inside and outside of cities
While the rise of remote jobs would allow many workers to move out of big cities, so far this does not appear to be the case. A possible explanation is that remote work requires good digital infrastructure, sufficient workspace, and a supportive regulatory environment with ample public services. In most OECD countries, rural areas rank poorly on a few of these aspects:
- Rural areas have worse broadband connectivity and lower internet speeds than cities.
- Residents of rural areas have less access to health care, transit and cultural activities than city residents.
Although fully remote workers could move almost anywhere, it appears that hybrid work arrangements and better infrastructure have kept many workers in or near cities. From 2019-20, metropolitan areas had the largest increases in remote work in both Europe and the United States. These areas already had the highest shares of remote-friendly jobs before the pandemic.
No panacea for rising prices
Many workers in metropolitan areas now need more space to work from home. Thus, prices of housing in and around OECD cities rose sharply after the start of the pandemic, especially in less-central (suburban) parts of metropolitan areas. Policies to alleviate urban housing pressures are needed, such as incentives to convert unused commercial property into residential or co-working spaces.
As remote workers are seeking more space in metropolitan areas, the Goldilocks scenario of high productivity and improved affordability in cities is unlikely to be realised in the near future. On the one hand, the trajectory of real estate is highly uncertain, as inflation pressures have already prompted interest rate hikes in many OECD countries.
On the other hand, although higher costs of borrowing are dampening demand for housing in some places, property prices in big cities are still be boosted by building, zoning and geographic constraints that limit housing supply. Clearly we cannot rely on remote work to reduce population and affordability pressures in metropolitan areas. Policy action, like improving non-metropolitan area infrastructure and amenities, is needed to address affordability challenges – now and in the future.
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To learn more about housing and cities in your area, check out the OECD report “Regions and Cities at a Glance 2022“.
Alison Weingarden is an economist in the Economic Analysis, Data and Statistics Division of the OECD’s Centre for Entrepreneurship, SMEs, Regions and Cities. Her research focuses on labour markets, business dynamics and rural-urban disparities. From 2015-20 she worked as a senior economist at the US Federal Reserve Board in Washington DC, where she helped analyse and forecast unemployment and productivity. Alison completed her undergraduate degree at Princeton University and holds an MSc from the London School of Economics and a PhD in economics from Georgetown University. Prior to her PhD, she worked at the US International Trade Commission and in the macro strategy research section of Credit Suisse.