Will cities shrink?

Posted by: Paul Donovan

29 Nov 2019
  • In emerging markets, urbanization (growing cities) is a key driver of UBS's Longer Term Investment themes. But in developed markets, the long-term themes of aging populations and disruptive technology may mean that cities shrink.
  • Technology changes demand for cities. Since the Roman Empire, people have been reluctant to travel more than half an hour to work. When travel is longer, people prefer working from home,  reducing the need to live in cities. Studies also suggest that applications like Airbnb raise rents in cities. Higher rents encourage people to live outside cities.
  • Meanwhile, several countries have or shortly will have falling populations. That automatically creates a high probability that the number of people living in cities in those countries will fall.
  • Shrinking cities create economic problems. Two seem especially important.
    • Governments tend to look to the past not the future for guidance; they may build new infrastructure that shrinking cities do not need.
    • A shrinking city can quickly become very inefficient: street lights on empty streets; public transport infrastructure for a non-existent population. This creates economic and environmental costs.
  • Urbanization is an important theme, particularly in emerging markets. But thought should be given to the economics of shrinking cities too.