Linden Labs, the operator of Second Life, has decided to increase the amount of virtual real estate in the game, causing a sudden drop in virtual land prices. This is interesting because in real life when cities expand the new land is at the edges, which is typically far from the more valuable centre, and probably has less of an impact on land prices overall.

In a virtual world, however, I guess that location is much less important. I don’t know exactly how people move around in Second Life, but in principle transportation in a virtual world from one location to another can be instantaneous and costless. In that case the distinction between ‘centre’ and ‘edge’ is blurry, and increasing the supply of land anywhere could affect prices everywhere, as appears to have happened in Second Life.

I guess there is a lesson here for real-world real estate investors. Improvements in transportation technology make cities more ‘connected’ and, everything else equal, should increase the correlation of real estate prices between different locations. My hypothesis is that with good transportation, extra land at the edges can have a significant effect on prices at the centre. It would be interesting to try to test this with some data.

(HT: UsableMarkets)