In a much-talked-about recent paper entitled “Superstar Cities,” economists Joseph Gyourko, Christopher Mayer, and Todd Sinai argue that such high-status cities – not only London, Paris, and New York, but also cities like Philadelphia and San Diego – may show an “ever-widening gap in housing values” when compared with other cities. The authors seem to be saying, in effect, that a housing boom in these areas can go on forever.
Any claim like that will inevitably attract attention. As a well-known skeptic about booming housing prices, I have been asked on several recent occasions to participate in debates with one or another of the authors.
Many people view the superstar city theory as confirming their hunch that, despite the current slowdown in home prices elsewhere (particularly in the United States), investors can expect to make huge long-term gains by buying homes in these cities, even though the homes there are already expensive. But, as I have said in my debates with the authors, if one reads their paper carefully and thinks about the issues, one would see that there is no reason at all to draw such a conclusion.
Why should home values in glamour cities increase forever? Gyourko, Mayer, and Sinai justify their claim by arguing that these cities really are unique. They have only limited land, and if one assumes ever-increasing GDP and rising income inequality, there will always be more and more wealthy people to bid up prices in these scarce areas.