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The Geography of Real Estate Markets Is Shifting Under Our Feet

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Our understanding of how real estate markets function is not keeping up with how real estate markets function. I'm concerned about that disconnect because policies aimed at unleashing supply in order to make housing more affordable use outdated models. While the geography of supply remains intrinsically fixed, the geography of demand keeps expanding in novel ways. A new game in Greater London:

Britons jostling up the housing ladder is a tradition at least as old as the dinner party. Wealthy foreigners from dicey places stowing their cash in safe and stucco-fronted London postcodes: we know all about that. But, as New Era illustrates, much bigger, far more restless, forces are now at work.

Consider the purchaser: Westbrook, headquartered on Madison Avenue, New York. Set up in the mid-90s, the investment firm came of age just as businesses were coming round to the idea that owning their premises was fuddy-duddy and that the future lay in renting.

Westbrook has made millions from that fashion – buying, letting and selling trophy-office development in London and around the world. And it's not been alone: in 2011 Cambridge academics found that 52% of the City's offices were now owned by foreign investors, up from 8% in 1980.

That trend is now migrating to London homes. By buying New Era, Westbrook has become a giant absentee landlord. No one from that firm will set foot on the Hoxton estate, of course. Indeed, since the Benyons' exit, tenants report they have not heard a word from the Americans who now own their homes. Instead, it's been the council who's conveyed messages back and forth. This relationship is extreme, but it's hardly anomalous. Rather, it's the inevitable result of property developers and estate agents renting out hotel ballrooms in Asia to sell flats off-plan to Singaporean dentists and the like.

Now that Westbrook has bought the New Era estates, residents will be pushed out as the current absentee landlords (living in another country) seek substantially higher rents. The demand for real estate has little to do with regional wages and more to do with the incomes of Singaporean dentists and the like. I suppose I could say that the geography of demand for residential housing is global or international. But I prefer the term "financialisation" mentioned in the Guardian article. Homes are now globally tradable. Generally, homes are non-tradable. One must live there to benefit from the transaction. Westbrook has tipped the scales in the other direction, dramatically increasing the potential price a home may fetch. Absentee landlords make deals with absentee tenants with no concern about whether or not the condo unit is occupied. Greater housing supply only means more widgets to be traded on the open global market.

The expansion of the geography of demand occurs at the international and domestic scale. Vancouver makes for an extreme example, highlighting the international linkages:

Senior economist Robin Wiebe, a former analyst at the Canada Mortgage and Housing Corporation, says it's true, Vancouver's prices are out of whack with personal incomes. …

… Wiebe researched the offshore influence on Vancouver's housing market between 1991 and 2013, finding "periods of faster growth in China coincide with growth in Vancouver's house prices."

Further, the volume of house sales and housing starts were also found to have a statistically significant relationship to GDP growth in China.

China's economy is a good predictor of Vancouver's real estate market. Better put, China's economy is a good predictor of demand for housing in Vancouver. As an aside, no analyst seems concerned with population change. And yet most stories about real estate markets in the United States reference such demographics. Real estate market models featuring population growth as a proxy for housing demand are deeply flawed.

Domestically, the booming trend of super-commuters in the United States:

Between 2002 and 2009, the most up-to-date data available, New York University's Rudin Center for Transportation found that the number of super-commuters in Houston doubled to 251,200, accounting for 13.2% of the local workforce. In Manhattan, the group grew by 60% to 59,000, with Philadelphia – 161 km (100 miles) away from the city centre – the biggest source of the city's long-distance workers.

The data are dated, almost nothing from after the last recession. Regardless, turn your attention to the Manhattan-Philadelphia super-commuting relationship. When defining a metropolitan area, commuting patterns rule. When defining a real estate market in the United States, metropolitan statistical areas (MSA) rule. The logic is sound enough. If you live in a region and commute to a job within that region, then your income defines demand within that geography. In 2009 (the number surely grown by 2014), 60,000 residents in the Philadelphia MSA could claim a Manhattan (core of the New York City MSA) salary. Manhattan salaries are playing havoc with real estate prices in Brooklyn (within the New York City MSA). Imagine what such incomes would do to an urban neighborhood in Philadelphia:

"This place sucks. … It just fucking sucks" was the sham Woody Allen Onion quote. It hit me: I can't live in New York. Then I was struck by the meta grand piano from a three-story building: What about … Philly?

In 2009, 60,000 people said New York City fucking sucks as a place to live in and kept the wage without the residential baggage. The gentrification problem emanating out of Manhattan hits a London neighborhood and a Philadelphia neighborhood long before hitting many actual New York City neighborhoods. We live in interesting times.