Cañas is a perfect example of the high-earning, globe-trotting cosmocrats who are driving housing prices skyward in the choicest world cities. From San Francisco and Seattle to Moscow and Shanghai, prices for prime residential property are surging, even as overall national numbers in some markets continue to be depressed amid worries of global recession and a real-estate bubble. The triumph of the glamour cities turns conventional wisdom on its head—for quite a while, experts including Yale’s Robert Shiller have been predicting that these cities, having been hyped the most, would likely fall farthest, fastest. The decoupling of national and local real-estate trends, which were once much more closely linked, reflects the lives of the new “superprime” property buyers themselves, roughly 50 percent of whom are expatriates, according to the global-property research firm Jones Lang LaSalle. While globalization has allowed money, but not necessarily people, to roam the world more freely, Cañas and his colleagues are an exception—they float on a cushion of international capital, largely immune to regional concerns, and are flush with cash.
They’re getting even more flush. A second consecutive year of big bonuses for bankers and traders has helped reignite demand for residential property in coveted neighborhoods like London’s South Kensington and the Upper West Side of New York. Even outside these chief financial capitals, a decade of bull markets has swollen the ranks of the superrich so much that there is now a class of property buyer who can collect pied-à-terre apartments in Paris and Buenos Aires the way the merely wealthy collect cars or wine. With so much money in so many more people’s pockets, the demand for luxury housing in the most-sought-after cities has simply outstripped available supply, hence the eye-popping prices. This is especially true in the toniest quarters of these cities, where growth is often double or even triple the over-all city figures. “It’s quite an interesting irony that these buyers are globally footloose,” says Sue Foxley, head of residential-property research at Jones Lang LaSalle, “because there are probably only 100 streets around the world on their shopping list.”
Not surprisingly, demand is highest in the business hubs—the globe-trotters want to live in style in the places where they work. In a city like Shanghai, the concentration of high-end service industries like banking and insurance has sent prices skyrocketing to levels three times higher than those in the political capital of Beijing. A similar phenomenon is at work in India, where prime-real-estate prices in the business capital of Mumbai shot up by 90 percent in 2006, outpacing even the impressive 60 percent rise in prices posted in New Delhi during the same period. The numbers underscore the disproportionate effect that the most highly paid service workers have on property prices. The urban real-estate markets where such talents congregate become what New York City Mayor Michael Bloomberg once called “a luxury product [that] offers tremendous value.”
While the “value” of a $1.5 million two-bedroom apartment remains debatable, the macroeconomic factors bolstering the boom are not. Superstar cities have their own individual growth dynamics, but they are helped along by the Goldilocks global economy (not too hot, not too cold). Although interest rates are starting to creep up across the world, they’re still hovering at historic lows, between 5 and 6 percent. This, coupled with strong and in some instances spectacular growth in many parts of the world, make a property meltdown unlikely. “In a low-inflation, low-interest-rate environment, housing busts are relatively mild by historical standards,” notes Nariman Behravesh, chief economist of the Massachusetts-based economic forecasting and consulting firm Global Insight. “As long as interest rates remain low, you’ll see a housing recovery and then a reacceleration.”
In places like New York, there was never really a deceleration. The National Association of Realtors reported last month that nationwide housing prices in the United States fell by an average of 2.7 percent in the last quarter of 2006. But prices in Manhattan were up by 14.4 percent in January of this year, according to the real-estate appraisal firm Miller Samuel. By some estimates, more than half of the top luxury buyers were expatriates, many of whom are cashing in on a weak dollar. “The market has been really flying since a couple of weeks before Thanksgiving, and good properties have been moving quickly,” says Harriet Norris, a New York City broker for the real-estate firm Prudential Douglas Elliman. “It’s not that I think New York City or Manhattan is impervious to a downturn, but none of the indicators are there to make it happen.”
The gravity-defying dynamics of high-end real estate in the world’s top cities contradicts the famously gloomy vision of chief property Cassandra Robert Shiller. The Yale economist made his reputation seven years ago, when he correctly predicted the stock-market collapse in his book “Irrational Exuberance.” In the second edition of that book, he applied the same analysis to the overheated housing market in the United States, blaming much of the staggering rise in prices on illogical herd mentality. Shiller is sticking by predictions of a 40 percent drop in housing prices in real terms over the next 20 years, and continues to warn that the bursting of the real-estate bubble will likely induce a major recession. “There’s a lot of faith in glamour cities, but these cities have been around for hundreds of years, going up—and down,” says Shiller. I don’t see any reason why this [upward] trend should continue this time."
But others aren’t so sure. In the new edition of “Irrational Exuberance,” Shiller drew heavily on the pioneering research work of Piet Eichholtz, a Dutch professor of real-estate finance who charted housing prices in a fashionable residential district of Amsterdam from 1628 to 1973. Eichholtz concluded that real housing prices grew by a mere 0.2 percent annually over the span of nearly 350 years, and Shiller cited those figures to support his general thesis that real-estate values rise very modestly over the long term. But Eichholtz himself does not foresee a collapse in housing prices in many of the world’s hot cities, including Amsterdam and Paris, for the next five to 10 years, because increasing urbanization and the growth of global wealth has more people chasing a limited number of city-center properties. “I’m not saying this process will continue forever,” he notes. “But for now, my prediction is growth.”
Further evidence that top cities may be less vulnerable to the usual boom-and-bust cycle comes from a lengthy working paper written by three economists from the Wharton School of Business and Columbia University for the non-profit National Bureau of Economic Research. The researchers identified several American cities like San Francisco, Los Angeles, Seattle and Boston that attract ever-larger numbers of high-income people willing to pay a premium to live there. The rise of such cities is rooted in the unprecedented proliferation of very affluent families in the United States that occurred in the second half of the 20th century. While the total number of families living in U.S. metropolitan areas doubled during that period, the number making more than $140,000 annually in constant 2000 dollars grew by eightfold.
Though the study focused on America, one of its authors sees a parallel process underway in some foreign capitals. “You need a combination of two things: a growing number of high-income folks who want to be together in a certain market and an unwillingness or inability to provide substantially larger numbers of new housing,” says real-estate and finance professor Joseph Gyourko of the Wharton School. “Certainly London fits the mold and so does Paris, where you have a growing economy, a skewing of income distribution and very limited supply in the areas that are much in demand.”
Of course, not all major world cities are enjoying a rebound in housing prices. Hong Kong has experienced a genuine collapse in its residential-property market, where prices fell by 2.6 percent in the third quarter of last year after soaring by more than 20 percent in the same period of 2005. In Australia, housing price increases in once thriving Sydney are lagging behind the national average. In both cases, rising interest rates were to blame.
The bigger worry is, what (if anything) could bring high-end real-estate markets to their knees en masse? Certainly a sustained depression in the world economy would induce a plunge in housing prices, no matter how tony the address might be. If the past is any guide, central bankers would play a big part in such a debacle. “The lesson we learn from history,” says Milan Katri, chief economist of Britain’s Royal Institute of Chartered Surveyors, “is that policy errors are almost always at fault when it comes to housing busts.” Consider the 1990s, when policymakers in Tokyo failed to cut interest rates fast enough to cushion a steep fall in the economy. Huge numbers of homeowners defaulted on their mortgages, and banks stopped issuing new loans. Britain experienced a similar disaster over the same time period, when a too-steep rise in rates (they doubled in less than a year) caused a housing crash.
There are plenty of experts who say central bankers have gotten a lot smarter since then—they understand the global economy and their effects on it much better, and know enough to avoid such bad policy decisions. A greater threat to the supercity boom might come from the globalization that started it in the first place. As the middle classes everywhere increasingly worry about downward mobility, protectionist rhetoric and a backlash against free trade and liberalization have been brewing, not only in Europe and the usual developing countries, but also in places like the United States, where, most recently, Democratic Party leaders in Congress may withhold approval of recently negotiated free-trade agreements with Colombia and Peru to reduce the influx of cheap imported goods.
The reintroduction of trade barriers and currency controls would undoubtedly slow down global growth, and eventually cripple residential real-estate markets. It’s happened before: a real-estate boom in the United States during the 1920s was aborted by the adoption of protectionist policies, which also helped set the stage for the Great Depression. Property prices back then fell even in the world’s greatest cities. That’s worth remembering as ex-communist tenement flats in Moscow garner wait-lists of buyers, and dark London mews houses on hip blocks sell for 30 percent above their asking prices. If the power brokers of the world can’t figure out a way to ensure that their prosperity trickles down a bit faster, their own houses may eventually take the hit.
