Prediction: after an economic decline cities will not be the desirable place to live, due to unemployment and social unrest. Remember when many parts of major cities like New York and London were considered no-go hell holes?
Consider a trendy city, beloved by tourists and home to a thriving economy and plenty of industry. Its housing market is starting to feel a bit strained. As an academic who grew up there put it, “Prices here began to take off and within a few years were growing at annual rates of over 15%,” after the housing crisis bottomed out.
No, it’s not San Francisco — nor is it New York, or even Austin, Texas.
“A similar story can be told about other large cities in the Netherlands,” writes Klaas Knot, the hometown boy, in a recent paper. “And more recently the rest of the country has followed this trend, albeit at a slower pace, which means that house prices are now rising everywhere,” he added.
Knot isn’t just any Amsterdam native. He’s also president of the Dutch central bank, De Nederlandsche Bank, which last summer organized an international seminar on the twin challenges faced by the developed world’s big cities: rising housing prices and falling housing supply.
As Knot noted in the foreword to a paper about the seminar: “Strong price increases are making urban housing affordability a pressing issue everywhere in the world. For central bankers, who are mainly responsible for financial stability, affordability may not always be the most important concern. However, extreme examples show this can become a problem for broader economic well-being.”
“Cities are becoming more and more popular all over the world, leading to a surge in demand for urban housing,” Knot and several co-authors write. That’s because they “have become the economic powerhouses” of their countries.
In a 2017 story, MarketWatch cited an economist who commented that the 15 biggest metro areas in the U.S. account for more than half of the national GDP.
That activity — not just jobs and education, but also what the researchers place under the “cultural events, creativity, recreational opportunities and of course the presence of other people” umbrella — lures people, which reinforces the attraction for people of similar backgrounds. (That’s not just well-educated and mobile young people, by the way. It also describes recent immigrants.) By 2100, academics estimate, 80% to 90% of the population will live in cities.
Another insight: It isn’t just people streaming into cities — capital is flowing in that direction, too. Housing is in demand as an “investment good,” not just for shelter. Importantly, investors can be foreign as well as domestic. That means that “house prices in the cities thus not only reflect the local factors such as supply constraints, regulations and zoning, but also global trends.”
Those “local factors” present another key takeaway, though. All real estate is indeed local, and, when space is scarce, any additional restriction on how it can be developed and used makes it a lot pricier. Importantly, Knot and his co-authors point out that this impacts not just purchase prices but also rental costs. Either way, middle-income households around the world are struggling to afford housing.