Robert Shiller vs Superstar Cities

It seems there's academic backup for my thesis that New York City property is only going up: a paper called "Superstar Cities" by Joseph Gyourko, Christopher Mayer, and Todd Sinai. Their thesis is simple: the number of very rich people living in cities is skyrocketing, while the supply of housing in those cities is rising much more slowly. Result: large price appreciation.

It's a dynamic which has played out around the world, from San Francisco to Shanghai. But Robert Shiller, the well-known housing bear, isn't convinced.

For one thing, Shiller doesn't believe that the supply of new land is really constrained, especially when you take into account the ability of new cities to be built. He gives a few examples, but unfortunately for him he gives them in alphabetical order, which means he's forced to start his list with Brasilia and Canberra. Neither of which is anybody's idea of a superstar city. Proof? Ask anyone in Brasilia whether they'd rather live in Sao Paulo or Rio de Janeiro; ask anyone in Canberra whether they'd rather live in Sydney or Melbourne. Now repeat the exercise the other way around.

The fact is that you can't build a superstar city by decree. No one really understands the factors which go into creating one: no one knows why New York is the superstar rather than, say, Baltimore. But it is, and there's nothing that Baltimore can do about it. The one thing we do know is that it has nothing to do with the city being "well-planned," as Shiller seems to think: there are lots of well-planned non-superstar cities, and lots of superstar cities which seem to have no planning at all. (Sao Paulo springs to mind as a prime example.)

But Shiller isn't giving up. "New cities are constantly ripening like so many cherries on a tree, drawing people away from older, original cities," he says -- but neglects to give any examples. To be sure, the number of cities, and the number of superstar cities, is growing, and there are also some older, original cities which are fading. Las Vegas is on its way up; Detroit is on its way down. But Shiller's specifically talking about new cities "within an hour's commute" of the old one, and I can't see that dynamic anywhere.

Shiller concludes that superstar cities, with their low rent-to-price ratios, are an unattractive place for property investors, which is something of a hard sell given what's happened to property prices in these cities worldwide. But I do think it's reasonable to think that property in a superstar city is a safer investment than property elsewhere. There's a constant and growing demand for property in unique cities, which helps to support prices. And you can't say that about suburban McMansions.

(Via Thoma)