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Superstar Cities: Inelastic Supply Of Land, No Substitutes

In Peter Coy’s San Francisco, Boston, and Other ‘Superstar Cities’ [BW] [1] he discusses the paper Superstar Cities [pdf] [2] written by Joseph Gyourko and Todd Sinai of Penn and Christopher Mayer of Columbia.

[Academia is getting hip: using ‘Superstar’ in the title was bound to attract attention to the work.]

The purpose of the paper (missing an abstract) is to explain why certain US cities have experienced rising housing prices that have outpaced the remainder of the country. The Businessweek post cites the old explanations for this phenomenon as better amenities and higher worker productivity. Real housing prices tripled over the past 60 years yet, these Superstar cities experienced much more significant appreciation.

They sum it up this way:

Living in a superstar city is like owning a scarce luxury good.

A superstar city is defined as having: a limited supply of places in which to live, and in the face of increasing demand exhibits rising prices. More importantly, a superstar city is unique enough that there is no close substitute city, thus keeping the supply inelastic. A superstar city is not necessarily everyone’s top choice of a place to live, but it is preferred by some people, and it cannot be easily replicated to satisfy their demand. The more people that prefer the city, the more expensive it will become relative to others.

The paper doesn’t really define what causes the demand but the phenomenon is occuring on the east and west coasts where land is scarce. The gap between the rich and not so rich could expand as population growth places additional pressure on the fixed supply of land ’cause they ain’t making that anymore.

Note: This paper seems to be related to another paper co-written by one of the authors Joseph Gyourko called Why is Manhattan So Expensive? Regulation and the Rise in House Prices [pdf] [3] which specifically tied housing price increases in Manhattan (using some of my data) to regulation. In other words, in addition to scarcity of land, other restrictions such as zoning have kept prices high.