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2016-04-12 05:05:07
Valuations in globalised cities are rising much faster than in their
hinterlands
Apr 2nd 2016 | New York
GLOBALISATION has created a handful of metropolises that attract people,
capital and ideas from all over the world, almost irrespective of how their
national economy is doing. House prices in such places, unsurprisingly, outpace
the national average. In our latest round-up of global housing, we find that
prices have risen in 20 of the 26 countries we track over the past year, at an
(unweighted) average pace of 5.1% after adjusting for inflation. Prices in
pre-eminent cities in these countries, however, have risen by 8.3% on average.
In a survey conducted last year, fewer than one in nine residents of Amsterdam,
Berlin, London, Paris, Stockholm and Zurich thought that it was easy to find
reasonably-priced housing. In these cities, house prices have risen at an
average pace of 6.5% a year over the past three years (again, unweighted),
compared with a national average rise of just 3.2%. The value of homes in four
cities on the Pacific San Francisco, Vancouver, Sydney and Shanghai has
increased by 12% a year over the past three years, twice the average national
pace.
The supply of housing is rather inelastic, so in the short term house-price
inflation is driven more by demand factors, such as the number of households,
disposable income, interest rates and the yield available on other assets. In
recent years all of these have helped to push house prices steadily upwards,
especially in big cities.
In the conurbations in question, the number of households is rising fast as
hordes of ambitious millennials pour in. Two in five of Zurich s residents were
born outside Switzerland; 44% are between the ages of 20 and 44. The boom towns
also have tight labour markets and therefore relatively high income growth: the
unemployment rate in San Francisco and Stockholm is around a percentage-point
lower than the national averages. Some are havens for second homes and money
seeking safety: foreigners snap up half of London s princeliest dwellings,
according to Savills, an estate agent. Finally, they provide a decent return:
net yields in Vancouver were 11% in 2015, according to MSCI, a data provider,
three percentage points above the average for Canadian housing.
Whenever the supply of a good is limited, there is potential for exuberance.
San Francisco s property market is intertwined with the technology sector:
since 2008 there has been a 93% correlation between the monthly movements in
the NASDAQ and house-price inflation in its metropolitan area. Since bottoming
out in early 2012, prices in Silicon Valley have risen by 73%, compared with
31% in America as a whole.
To determine whether homes are fairly valued The Economist looks at the
relationship between prices and disposable income (an indicator of
affordability) and between prices and rents (a substitute for buying a home).
If rising prices move these ratios above their long-run averages, then either
incomes or rents are likely to rise, or house prices to fall.
Across America house prices, after falling by 25% from their peak between 2007
and 2012, are now at fair value compared with rents and incomes. In San
Francisco, too, they are at fair value when compared with rents, but 45%
overvalued relative to incomes. Thanks largely to their big cities, housing
appears to be more than 40% overvalued in Australia, Britain and Canada,
according to the average of our two measures. Between 2002 and 2012 the typical
London home sold for seven times the city s average annual salary. That figure
has since risen to 12 times.
As property developers from Las Vegas to Limerick will attest, when supply does
eventually respond to soaring demand, property prices fall. Restrictive
planning laws curb new construction in the area around San Francisco Bay; the
narrow peninsula that San Francisco itself occupies compounds the problem.
London suffers from an even more severe planning regime. Yet housing starts are
at a nine-year high in San Francisco. In London, too, builders are finding a
way: construction began on 24,000 new homes in the capital in 2015, the highest
rate for ten years.