The emergence of “supercities” is a frequent refrain amongst those who believe that San Francisco is amongst an elite group of cities whose property values are relatively immune to decline. From Newsweek International:
Further evidence that top cities may be less vulnerable to the usual boom-and-bust cycle comes from a lengthy working paper written by three economists from the Wharton School of Business and Columbia University for the non-profit National Bureau of Economic Research. The researchers identified several American cities like San Francisco, Los Angeles, Seattle and Boston that attract ever-larger numbers of high-income people willing to pay a premium to live there. The rise of such cities is rooted in the unprecedented proliferation of very affluent families in the United States that occurred in the second half of the 20th century. While the total number of families living in U.S. metropolitan areas doubled during that period, the number making more than $140,000 annually in constant 2000 dollars grew by eightfold.
Though the study focused on America, one of its authors sees a parallel process underway in some foreign capitals. “You need a combination of two things: a growing number of high-income folks who want to be together in a certain market and an unwillingness or inability to provide substantially larger numbers of new housing,” says real-estate and finance professor Joseph Gyourko of the Wharton School. “Certainly London fits the mold and so does Paris, where you have a growing economy, a skewing of income distribution and very limited supply in the areas that are much in demand.”
Of course we must mention that luxury-home prices in central London fell 1.7% in June. And that’s two months of decline in a row.
∙ Endless Light [Newsweek]
∙ London Luxury-Home Prices Declined for Second Month [Bloomberg]
I always believe people from R.E. willing to pay anything… to have some kind of reports that favorite the R.E. Market, tell one side of the story, help to bottom out the downturn, convince the buyers that it’s time to buy…
Sorry Folks, the property is not going to go anywhere, the price is not going up for next 2 years, there is no sign of bottom out until the price stay flat for 6 months straight.
It is the time of “Waiting Game.”
Key phrase “less vulnerable”. I agree there are certain large cities “less vulnerable” to declines but that certainly does not make them “invulnerable”.
Have we forgot owners in the 80’s setting buildings on fire in Manhattan because they couldn’t find a buyer, period.
A year ago LA was supposed to “less vulnerable” but it has seen some pretty hefty declines across all price levels.
And let’s all keep in mind that so far all we have seen is the housings bust effect on the economy, but with job losses piling up we will soon be seeing the economies effect on housing as the tens of thousands being let go from their jobs struggle to make their mortgage/HELOC payments and with frozen HELOCs, declining stock portfolios, and rising food and energy prices we are likely to see another significant leg down in housing across the nation.
But obviously some markets will the “less vulnerable” then others.
So, you did a google search and found a bloomberg article showing a mild decline in one segment of the london market and therefore you’ve outsmarted three economists from wharton & columbia? Nice one.
If you read your own post, it says “may be less vulnerable”. How can you say that this has not been the case in San Francisco? While places like Stockton have fallen by 30%+, SF has been flat. The whole country is in a tailspin and we’re plodding along horizontally.
Weak post. Weak argument backed with no data.
This is what Gyourko concluded of Bay Area housing in 2002 (umm, apparently before it’d become “super” and local employment creation was relevant to his economic thinking):
Knowledge at Wharton, the award winning online resource offering business insights, information and research, published an article on the current real estate market, citing Wharton’s real estate experts. Following several years of home price appreciation, are prices a bubble about to burst? Joseph Gyourko, Chair of Wharton’s real estate department and Director of the Zell/Lurie Real Estate Center points to the San Francisco housing market as a potential regional bubble. “There are clearly markets, the Bay Area being the most prominent, where the pricing implies pretty high appreciation going forward. It’s hard to see how you are going to get that with the collapse in technology. I would consider that a bubble. But in a typical market, no. I don’t think we’re in a bubble. I think prices, while up, are not unreasonable in most markets.”
http://www.whartonrealestate.org/newsletter.php?article=2002-07-2
Expect him tomorrow and beyond to spin ever-new stories and “theories” for San Francisco as circumstances dictate.
Just don’t take them seriously.
Homeless Guy- you do realize the best economists in the world are often wrong don’t you? It’s how it’s always been and how it will continue to be. Just keep in that mind before bashing the socketsite editor.
Read debtpocalypse’s post above for further details.
Heard of concentric circles before? Or about the outlying areas showing weakness first and the problems moving inward? Keep watching…
They said “supercities”, right? Not some tourist trap with a few nice views 🙂
Sorry, neither concentric rings nor crop circles serve as good economic predictors. The only validity to concentric ring phenom is how it pertains to development. Clearly, more cheap land is available the further you get from an economic hub. (Look at Vegas.) But housing collapses would follow that pattern only when housing stock maps tightly to the rings. The bay area is collapsing on the outer rings primarily where overbuilding occurred. I think SOMA is a prime candidate for price collapse and it’s dead center in the center of the rings…
In any event, the authors are talking about “relative” declines. (Read the subhead above: relatively immune.) It doesn’t say “immune” as the author of the post implies in the headline.
Agreed that no place is immune from declines, but the London luxury market is not (yet) a good example. From the article, prices may have declined 1.7% from May to June, but are still up 7.5% year-to-year. And vastly higher than in SF.
Just like NYC in the 1970s. Splat.
Interesting research. As others have pointed out, nowhere do they state that such “supercities” are immune to downturns, just less vulnerable overall. This cannot be measured by real estate prices alone, especially short term year-over-year prices, or when a given metro has recently experienced significant price increases.
A one month decline of 1.7% in London when prices are still up 7.5% over-year? Uh, I think a piece of sky just hit me in the head.
Let’s not dissect minutia here. Implication: if prices in Concord fall 40% peak to trough, SF proper may only fall 10-15%. Nothing earth shattering there.
Regarding London, this is just the beginning for them. Look for UK prices to get crushed in the next few years. If I recall correctly, UK mortgages tend to be mostly floating rate, interest is not tax deductible, and LTVs during the bubble reached 125%. The buy vs. rent math there makes SF look like a bargain, and half the people own “investments” in Spain or other imploding markets.
But SF is nothing like London! I mean, who’d want to live in cold London with all that fog??
Oh wait…
Yeah, economists keep looking in the rear view mirror and try to deduct the road ahead with as much data as possible.
I’m pretty sure Wall Street and Banks had tons of economic data from very very smart people to tell them everything would be A-OK and that they could lobby for widespread deregulation in the lending/securitization industry.
Everything always goes according to projections until they don’t.
I agree with Dave, “may be less vulnerable” is hardly fightint words. Why the incongruous little editorial London note? It reads as a pedantic sweet bear cupcake.
I can say I agree with the fact that some “superstar” cities do attract the best and brightest. I see that everyday firsthand.
World class talent look at the location as much as the company when hunting for their next job, and SF is definitely among a few others at the top of the heap.
“A one month decline of 1.7% in London when prices are still up 7.5% over-year? Uh, I think a piece of sky just hit me in the head.”
Average prices in London as a whole are down 2.30% from a year ago. Prices in the nine most expensive boroughs are up 7.5% yoy but now seem to be declining as well. I guess the other boroughs aren’t in the “real London” though.
[Prices in the UK as a whole seem to have peaked early this year and are now in a pretty rapid yoy decline.]
Armchair London real estate experts are “really” awesome.
I would prefer to use the “reductio ad absurdum” technique to show that even the San Francisco housing market is susceptible to housing downturns.
If you assume that San Francisco is immune to housing downturns then when housing price rise both San Francisco house prices and the outskirts, for example Stockton house prices will rise. During the downturn only Stockton prices will fall. After a few cycle (there have been three since 1975) you will have prices in San Francisco possibly 10 times the prices in Stockton even if they started at twice those of Stockton. In fact you can currently get single-family homes in Stockton for 100$ per sq ft while some parts of San Francisco cost 1000$ per sq ft.
Is it possible that San Francisco prices could be 20 times prices in Stockton? If it were so, then you could easily buy a house in Stockton “outright” for one year’s mortgage payments in San Francisco. If you think this is unlikely to happen then San Francisco and Stockton house prices are linked (may not be one for one). And as Stockton house prices have fallen significantly, San Francisco prices are also vulnerable.
Yeah, and that’s what the article said too. The economists said, “may be less vulnerable” not invulnerable.
But who cares? I happen to subscribe to superstar city myself somewhat. As pointed out tho, economists are often wrong. And armchair economists aren’t even afforded the status to be wrong.
This thread is quintessential.
Inflation will help prices to, eh?
“”There can be no doubt that even property in prime central London has been hit by the double whammy of the credit crunch and wider concerns over the global economy,” said Liam Bailey, Knight Frank’s head of residential research, in the statement.”
stupid “armchair” head of residential reasearch sitting in london…
Not the point.
Gavin
10 times look pretty extreme, but I wouldn’t be surprised to see a permanent 3-5 ratio. Just remember that SF is a city of renters and that middle-income and well-off newcomers do twist the sales market to the upside.
In downturns, imbalances can be pretty huge.
Let me take a concrete example:
in Paris in 1997, the inventory of studios in central but “bad” neighborhoods was very high and there were just no buyers. The middle class wouldn’t touch these areas, neither would the upper class. They kept to their usual playground and had plenty to play with, as prices had taken a 30% hit in premium locations.
The worst-off nabes were pure “price to market”, very much like distressed areas today. People who really had to sell for whatever reason were just out of luck. A lot of places were left empty and got squatted, making the resale value plummet some more. Almost any offer would be taken into consideration. I mean ANY. Prices were sometimes less than $100/sf when the good areas were at 700.
There you go: 10 to one ratio. You got to see it to believe it.
Since then, prices have greatly recovered and the bubble that we saw in the US also inflated prices in Paris. And the same phenomenon than in the Bay Area: The prices went up in the best areas, and that pushed buyers to the outskirts, pushing further and further price increases, until all the bargains got exhausted and prices became relatively uniform. Good nabes commanded just a 60% premium over the worst places in the boonies at the peak.
Sounds familiar?
In Tokyo, a world financial capital, and a genuine superstar city, real estate prices have plunged as much as 80% since 1990.
These economists are just doing what they do best: extrapolating recent history a little bit into the future. To do anything else would upset their peers, and the head of their [academic]department.
There is no new special class of the affluent in these cities, just a lot more people with a lot more debt.
“Somewhat less vulnerable”
vs.
“Immune”
AND LET THE GAMES BEGIN.
bye everyone. happy 4th!
Sorry, fluj. We stupid bears forgot that you and you alone are the sole expert and omniscient arbiter on all things real estate. At least on blogs. Going forward, any opinion contrary to yours will be categorically dismissed (another seemingly quintessential feature of most recent SocketSite discussions). Thanks for keeping us honest.
http://www.bloomberg.com/apps/news?pid=20601068&sid=a4j6WjktHB8I
http://www.lettingnews.com/2008/06/price_of_city_centre_flats_plu.html
http://www.thisislondon.co.uk/standard/article-23489247-details/Flat+for+sale,+%C2%A31m+price+cut/article.do
I thought the following extracts from Business Week’s May 31 2008 issue were interesting, talking about what $1.5m buys you in the world’s most expensive R.E. markets. To buyers in these markets, S.F.’s price points might seem somewhat forgiving –
1. London
Price: $6,191 per sq. ft.
What you get for $1.5 million: Small studio apartment
Annual price change: 29%*
A housing boom began in Central London in September, 2005, and continued through 2007, as wealthy buyers flowed in from around the world. The annualized growth for prime real estate is slowing this year and is expected to weaken further. But the super-luxury segment remains incredibly strong. Sales for £10 million-plus homes in Belgravia, Chelsea, Knightsbridge, and Mayfair increased by 190% in the six months ending January, 2008, compared with the same period a year earlier.
* The annual price change compares the fourth quarter of 2007 with the fourth quarter of 2006.
2. Monaco
Price: $5,888 per sq. ft.
What you get for $1.5 million: Studio apartment
Annual price change: 25%
5. Hong Kong
Price: $4,507 per sq. ft.
What you get for $1.5 million: Studio apartment
Annual price change: 21%
6. Manhattan
Price: $4,320 per sq. ft.
What you get for $1.5 million: Studio apartment
Annual price change: 25%
At the high end, Manhattan continues to boom even as the credit crunch deepens. In fact, in the first quarter of 2008 average prices were up 19% and the price per square foot was up 16%, according to the Corcoran Group. There are several reasons: First, the city has been shielded from the subprime crisis, largely because its co-ops and condos are well out of reach of most buyers with poor credit and shaky finances. Second, it remains a popular destination for movers and shakers in the financial, entertainment, and media world. Last, because of the weak dollar it is more affordable than ever for wealthy foreigners looking for a Manhattan pied-à-terre.
9. Singapore
Price: $2,423 per sq. ft.
What you get for $1.5 million: 1 bedroom
Annual price change: 31%
10. Tokyo
Price: $2,334 per sq. ft.
What you get for $1.5 million: 1 bedroom
Annual price change: N/A
I saw this article in Business Week. The prices appear to be for the very high end, at least for cities I know. It’s not the average, but cherry picked properties.
Fronzi, of course, is right. Most of the numbers quoted in that article are grossly exaggerated. $4,300 psf in Manhattan? Maybe in 2050. Today it seems to be around $1,000 to $1,200 for the places real people live in (rather than pied-a-terres for Robb Report subscribers). Check craigslist if you don’t believe me – you can get newer 2-bedrooms in Manhattan for under $1.5.
And why was Moscow left off the list?
Manhattan, Singapore, Tokyo, Hong Kong, etc. are true world cities that are vital economic centers of their regional areas. I would be more willing to entertain someone explaining the importance of San Jose and the Peninsula being a unique region, than tourist driven San Francisco. If you want to see a supercity with a huge diverse economy, go to Los Angeles, where real estate is falling.
“6. Manhattan
Price: $4,320 per sq. ft.”
Since when did all of Manhattan move to penthouse apartments on 74nd and Park Avenue West ? I’ll bet the lunch line at Zabars is around the block three times now.
“Armchair London real estate experts are “really” awesome.”
I’ll have you know that my great-grandmother is from the City, and Mrs. Foolio spent a year there after college.
Judging by the “what’s the real Midwest” debate, that should be enough…
Fronzi,
I believe you are right – this is the top end of the top areas of town. Nonetheless, some of the numbers are mindboggling, and I thought interesting. Also notable was that the 10m pounds and above [$20m+] doesn’t appear to be waning at all.
Dude,
I pulled from the top 10 on the list … I can only assume that Moscow’s top end may be below 2335 per sq. ft, although the city on average is among the most expensive in the world. Just a guess – I’m not sure.
Moscow was number 13, according to the Business Week article
Moscow
Price: $2,235 per sq. ft.
What you get for $1.5 million: 2 bedrooms
Annual price change: 35%
The Moscow real estate boom, which was driven by Russia’s rapidly growing economy, is starting to slow. But prices for high-end property continue to reach new heights. Indeed, many of Russia’s tycoons made their money in real estate.
Great. So their estimate of Manhattan is roughly 350% inflated vs. current listings I see on craigslist. If you apply that same discount to the other cities, San Francisco doesn’t look so “forgiving” anymore unless you actually are an oil tycoon. Champagne wishes and caviar dreams!
and your point is what?
My point is the Business Week article is essentially useless as a gauge for San Francisco housing prices, on both an absolute and relative basis. Quite frankly, so is the comparison to London luxury real estate.
First off, Business Week’s price points, at least for Manhattan, are demonstrably wrong. By orders of magnitude.
Second, who gives a toss what home prices in Monaco or Tokyo are? Are you going to transfer your job and life to Tokyo at leisure? Hey kids, just found a great gig writing code in Dubai, time to move across the world and learn to speak/read Arabic! Maybe next year we’ll move to Tokyo or La Ciudad!
The point: local prices are still too high based on fundamentals such as local incomes and buy vs. rent IN THIS CITY. Being cheaper than London means nothing. San Francisco has always been cheaper than London, and always will be. Doesn’t mean prices here are sustainable.
I’m done for today, off to my second home in Oslo before yachting down to my pied-a-terre in Kuala Lumpur. Happy Fourth!
Dude,
I’m not sure what you mean either. The 21st ranked most expensive place was Valais [Switzerland] at $1373 per sq. ft. Presumably San Francisco is below this level. If so, how are we to apply your ‘350% inflated’ metric to create champagne wishes and caviar dreams?
A year ago, newsweek ran a article along the same lines, and San Francisco was the quintessential superstar city. Detractors, get lost!
http://www.newsweek.com/id/36240?tid=relatedcl
If SF were to split out a fifth of its area and call it NOCA (North of California St.), the #s from this district would be on par with and possibly blow Manhattan to bits.
I don’t see bumpkinland on that list. You know what I’m sayin’.
Ok, I’m sorry but someone had to say it:
“SF’s SUPER! Thanks for asking!
All things considered it couldn’t be better I must SAY!
SF’s feeling super! And nothing bugs it
Everything is super when you’re…
don’t you think I look cute in this hat?”
What is it that causes San Franciscans to compare themselves to London (!), Paris, Tokyo, and even New York? If San Francisco is acting like a “superstar”, it could be because it has an urban ego out of all proportion to its size and importance.
The reason I think S.F. housing north of California WILL behave like London and other superstars is because it is such a rare unique location that it attracts people to buy there that have had nothing to do with San Francisco’s economy. They buy here because it is “pretty”, charming, and rather quiet, but please, let’s not try to convince oursevles that people buy here to be in the center of things. Sure we have “culture”, but we show our own provincialism comparing ourselves to London and N.Y.C. One visit to any of London’s public galleries, theater, and other culture venues should put any S.F. booster in his/her place.
Nobody was talking about out of whack civic pride here. We’re talking about a specific Newsweek article, and a theory about superstar cities.
lets see, whateva,
restaurant scene-world class
sailing venue, ditto
surfing opportunities, biotech, web 2.0, VC mass, higher education concentration, proximity to stunning wine country,ski country,camping country..check,check,check…
provincialism works for me!
Paco, you are so right, but these things are not superstar city activities. They are great and the reason to live in the Bay Area, however.
“Camping, skiing, surfing, etc.” are all things I did growing up in Newport Beach, but I would hardly call that a superstar city activities either. Your point that San Francisco is really Santa Barbara with skyscrapers and homeless is well made indeed.
@indeed : it’s common to credit SF alone with all positive attributes of the bay area in general. Best to learn to live with it 🙂
Recent ORH buyer,
Paying $1.5 million for a Studio apartment in Hong Kong? Are you out of your mind? Last year my relatives paid $200k for a four bedroom in Mongkok. Okay that’s only 60sq.ft. bedroom we are talking about. But it is what a typical apartment in Hong Kong looks like. Business week must be surveying some ultra luxury apartment that is totally out of touch with how regular people live.
“it’s common to credit SF alone with all positive attributes of the bay area in general”.
The only thing I could add to this is that many members of the San Francisco real estate industrial complex credit S.F. for not only Bay Area attributes, but California attributes as well. I had no idea one could ski down twin peaks?, or camp in Golden Gate Park? (watch out for the needles and homeless btw). I will give the city credit for surfing, but would rather choose areas near Santa Barbara for that sport.
Wai,
I’m fairly certain your relatives wouldn’t pay $200K for a 4 bedroom in Central, right? As per my post @ July 3, 2008 1:16 PM I stated that it looks like Business Week is using the top end of the top areas of town. Let’s face it, $4,507 per sq. ft. is certain not unheard of in HK, even though it may not be the norm? I’d revert to Business Week for more details on their methods – I just thought it was interesting what some pay elsewhere in the world.
OK， I found a transaction in Hong Kong in Jun 2008 that goes for $5256 per sq ft. That’s a penthouse with a private pool go for 29 mil. The stratospheric price reportedly breaks record of highest apartment price in Asia.
http://big5.jrj.com.cn/gate/big5/finance.jrj.com.cn/news/2008-06-20/000003772846.html
http://en.wikipedia.org/wiki/The_Arch_(Hong_Kong)
But this thing is such an outliner that it is a poor indicator to the actual real estate market. It is like saying in San Francisco you’ll need about 30 mil to afford an apartment in Sea Cliff. Interesting tidbit, but it is not even close to what most people are actually paying.
By the way I’ve reread my first comment and I want to clarify that the phrase “are you out of your mind” is just my reaction to the number. It means no offense to anybody.
Guys, that Business Week article cited was essentially a piece of schlock journalism intended to showcase how jaded the insanely rich can get – the relevance to normal people is basically zilch (aside from entertainment value), which is why I threw out the “Champagne wishes” quote ala Robin Leech.
Say some oil sheik builds a 6,000 square foot dog house out of solid gold. Now I’m supposed to feel more comfortable about spending $900 psf for an overpriced San Fran condo at near-peak bubble prices? Hardly. Every grossly inflated price quoted in that article can easily be proven wrong with a quick internet search.
But hey, since we’re seeking entertainment value at the margins, here’s an equally germane article on the world’s most expensive hamburger, which sells for $175:
http://www.forbestraveler.com/food-drink/most-expensive-burgers-story.html?partner=fp_hamburger
So now you can think about how lucky you are to live in San Francisco, where you only have to spend $9 at Bistro Burger. Wow!
It wasn’t all bad. Before the writer got on the Wharton Three he made a point, shedding light on a little bit of irony, that I liked. It had to do with Piet Eichholz disavowing any correlation between 17th century Amsterdam and today’s r.e. market and instead for now predicting “growth.” That was pretty much the opposite of what Shiller said when he used Eicholz’s study in the second edition “Irrational Exuberance.” Or so said the Newsweek writer.
but what a bargain compared to London! From NPR this morning, regarding the UK housing downturn – http://www.npr.org/templates/story/story.php?storyId=92329251
[Editor’s Note: Moved from the post on 235 Broderick.]