The impact of COVID-19 on the pricing of offices and the residential market : empirical evidence from Hong Kong

Abstract

Ever since the outbreak of COVID-19 in 2019 work from home (WFH) has become a new norm for many companies and businesses. Hybrid working reduces the need for physical interaction and increases the time people spend at home, which may affect the pricing of attributes of office and residential units. This study aims to examine whether COVID-19 has impacted the implicit prices of some property attributes in the office and residential markets. Specifically, the objectives of this study are to (1) to investigate whether the values of proximity to the CBD and accessibility to public transportation have changed after COVID-19. (2) to examine whether COVID-19 has changed the size and age effect on the prices of residential units. Based on the empirical analysis of more than 120,000 residential and 3,800 office transactions, this study shows that: 1. The value of proximity to CBD has declined in the office market after COVID-19 which suggests that WFH and other flexible working arrangements using new technologies made it less important for offices to be clustered in the CBD area since many physical contacts can be substituted by electronic means. However, accessibility to public transportation as measured by the distance to the nearest MTR exit has not declined significantly by COVID-19 indicating persistent demand for commuting amongst MTR network stations despite less demand for commuting to the CBD. 2. The above results from the residential market are similar which further confirms the results obtained from the office market. 3. The residential transaction data also show that, in general, the unit prices of housing units smaller than 60 m2 have increased after COVID-19 other things being equal, which is consistent with the conjecture that more space at home is needed for the WFH arrangements, especially for units smaller than 60 m2. 4. In addition, the residential market data show that the negative age effect has, on average, increased for residential buildings older than 25 years. This shows that people are more concerned about the health and hygiene performance of older buildings after COVID-19. Another possible reason is that improvements in internet connections may be more difficult for older buildings. The results show that COVID-19 is a catalyst for decentralization. Proximity to CBD is becoming less important with the adoption of new technologies. While decentralization can reduce the demand for commuting to the CBD, it also increased the demand for commuting amongst non-CBD areas. This study shows that the demand for public transportation has not been reduced as a result of accelerated decentralization due to COVID-19. Therefore, the government should continue to invest to improve the public transportation network. The increase in demand for more space at home for WFH arrangement in the small to medium size housing units (SFA<60m2) indicates that the demand for medium-sized units will increase while that for nano flats will decline. The stronger negative age effect after COVID-19 also suggests a general increase in economic obsolesce of older residential buildings due to poor maintenance and difficulties in adopting new communication technologies in these buildings. The result supports lowering the threshold for compulsory purchase to facilitate redevelopment.