downtown-vancouver

To paraphrase what a presenter said at a conference I recently attended, gentrification must be stopped before it starts. That policy recommendation should shake the foundation of your community. Urban America is filling up (PDF):

In the face of geographic constraints and politically-imposed restrictions on development, it seems natural that high-demand metropolitan areas could become more inelastically supplied over time as they grow and begin to “fill up”. This process would appear as a market moving over time from area C to B to A. Comparing Figures 9 and 10, we observe such an evolution. In 1980, only San Francisco and Los Angeles clearly qualified as superstars, as can be seen in Figure 10 which plots the price growth-to-unit growth relationship over the 1960-1980 period. Between 1980 and 2000, twenty more MSAs filled up, becoming superstars.

To be a superstar metro, to “fill up,” means high incomes piling into a place with constrictions on construction. What a superstar metro doesn’t mean is strong population growth and demand for housing outstripping supply. For appreciating real estate, quality trumps quantity.

We live in interesting times. Geographically, real estate markets are understood as non-tradable. Real estate markets are local. Housing demand and supply fit within a region. What happens in Vegas stays in Vegas.

What happens in China stays in Vancouver, Canada:

The globalization of real estate upends some of our basic assumptions about housing prices. We expect them to reflect local fundamentals—above all, how much people earn. In a truly global market, that may not be the case. If there are enough rich people in China who want property in Vancouver, prices can float out of reach of the people who actually live and work there. So just because prices look out of whack doesn’t necessarily mean there’s a bubble. Instead, wealthy foreigners are rationally overpaying, in order to protect themselves against risk at home. And the possibility of losing a little money if prices subside won’t deter them. Yan says, “If the choice is between losing ten to twenty per cent in Vancouver versus potentially losing a hundred per cent in Beijing or Tehran, then people are still going to be buying in Vancouver.”

Emphasis added. We expect what local people earn to set the price for housing. That leaves out expecting a reflection of local fundamentals to be a function of population. Population goes up, rents could go down. Population goes down, rents could go up. In the latter scenario, an influx of brains trumps a larger egress of labor in the non-tradable sector. Construction workers move to where the housing starts are.

The housing starts are where the brains are located. For real estate developers, the return on investment is best where globalization runs amok. Where globalization runs amok varies by neighborhood. If a metro can fill up, then a neighborhood can fill up. In fact, metros “fill up” before all its neighborhoods do. Global labor, like all labor, is risk averse when it comes to migration. A good reputation beats superior amenities, “house prices do not rise in superstar cities because there is increasing value from amenities or productivity benefits.”