The rise of a truly global real estate market

The most expensive housing market in North America is not New York City or Orange County, California, but Vancouver, British Columbia. It is a beautiful city with a thriving deep-water port, is a popular site for TV and movie shoots, and by all accounts, a wonderful place to live. But nothing about its economy explains why – in a city where the median income is only around $70 000 – single-family houses now sell for close to $1-million apiece and ordinary condos go for $500 000 or $600 000. When price-to-income, or price-to-rent, ratios get out of whack, it’s often a sign of a housing bubble. But the story in Vancouver is more interesting. Almost by chance, the city has found itself at the heart of one of the biggest property trends of the past two decades—the rise of a truly global real estate market.

The nature of the trend is that a torrent of capital has been flowing from wealthy people in emerging markets – such as China, Latin America, Russia, and the Middle East – into the real-estate markets of big cities in other countries, driving up prices and causing a luxury-construction boom. What’s so special about the places that attract all this foreign money? Economists have developed a theory about what they call “superstar cities.” Looking at data from 1950 to 2000, they found a small number of cities where housing prices rose steeply, and concluded that high earners tended to cluster together over time, with the result that rich cities tend to get richer.

But Vancouver isn’t an obvious superstar. It’s not home to a major industry – as New York and London are to finance, or San Francisco to tech – and it doesn’t have the cultural cachet of Paris or Milan. Instead, Vancouver’s appeal consists of comfort and security, making it what Canadian urban planner Andy Yan calls a “hedge city.” They offer social and political stability, and, in some cases, long-term protection against climate change as well. “There are now rich people around the world who are looking for places where they can park some of their cash and feel safe about it.” A recent paper by two Oxford economists bears this out.

This globalisation 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.

But the challenge for Vancouver and cities like it is that foreign investment isn’t an unalloyed good. It’s great for existing homeowners, who see the value of their homes rise, and for the city’s tax revenues, but the steadily rising prices that foreign investment inevitably spawns also makes owning a home impossible for much of the city’s population. And the tendency of foreign buyers not to inhabit investment properties raises the spectre of what Yan has called “zombie neighbourhoods” in which a high proportion of luxury condos stand unoccupied. One solution to this problem might be to severely restrict foreign ownership, but that would be politically difficult and economically unwise. So it might make more sense to charge foreign buyers a premium for the privilege of owning in select neighbourhoods.

By James Surowiecki - Staff writer at The New Yorker since 2000. He writes The Financial Page.