Asymmetrical Information - Megan McArdle

10.02.12

Will DC Become a World City?

DC house prices are strong and rising. Will outsiders seeking pieds-a-terre boost them even further?

In response to my recent piece on the rather extraordinary increase in DC housing prices, Richard Layman responds that the limiting factor is not local incomes, but the international capital class:  

The problem with McArdle's analysis of the DC housing market is her perspective is too narrow.

She's focusing on her neighborhood and not the more "global" or exogeneous forces that shape the "local" market for residential property in the city and the region.

The market for real estate isn't limited to just people living in DC, but is shaped by people working here, and is also open to nonresidents from the US and abroad who have the money and inclination to own housing units in multiple cities.

And of course, we can't ignore the reality of a market economy. People with higher incomes can bid up and outbid people with less money for desirable goods and services, in this case, housing.  (Also see the past blog entry "Low income, high income, the market and the right to the city.") 

As DC becomes a global city, there will be greater demand for housing by itinerants, which pushes prices up. We won't be like London (wealthy Russians and Middle Easterners make up a big proportion of the market, see this report or start reading the House & Home section from the Weekend edition of the Financial Times), but there is impact on the "local" housing market from global buyers. Certainly most people remember the "first" condo units downtown earlier last decade and looking up at night at the buildings and seeing very few lighted units.

So what happens is that the people crowded out of the submarkets that are increasingly global--especially in the core of the city--in turn relocate elsewhere in the city to outlying neighborhoods that aren't part of the global market, in the process the prices go up.

So in the context of the metropolitan market for residential property, DC neighborhoods are being priced upwards, while outlying areas may decline or remain steady (Arlington for example is a very strong market for residential property). 

As more neighborhoods become pricy, people move to the next closest but cheaper neighborhood, continuing the process with the end result of "reintegrating" the neighborhood into those set of neighborhoods considered attractive and repricing upwards the real estate in that neighborhood.  

I take the point as it applies to New York and London--Layman links a New York Times piece containing this extraordinary statistic:   

In a large swath of the East Side bounded by Fifth and Park Avenues and East 49th and 70th Streets, about 30 percent of the more than 5,000 apartments are routinely vacant more than 10 months a year because their owners or renters have permanent homes elsewhere, according to the Census Bureau’s latest American Community Survey.  

But is DC really going to become one of those cities?  I love my adopted hometown, but let's be honest: it's parochial, bourgeois, and somewhat lacking in world-class amenities.  It's also hot, humid, and abominably buggy in the summer.  What is going to attract our globetrotters seeking $1.2 million pieds-a-terres?  

The shopping?  This is a town where you cannot swing a cat without sending it through the petites section of an Ann Taylor Loft.  

The arts?  The Kennedy Center is very nice, and we have several very good theaters.  But DC is too expensive for starving artists, and doesn't have enough population, or genteelly decaying fortunes to support the kind of arts infrastructure that New York and Chicago have.  We have many very good museums, but the exhibits don't turn over often enough to bring in the jetsetters en masse.  

The dining?  DC's food culture has improved massively since I moved here five years ago, but there's still no question that I'd pick at least half a dozen cities over DC if I wanted to go on an eating tour.  

The proximity to nature?  There is a little bit of good hiking nearby, but almost every city I've lived in has featured better sporting and beaching opportunities.  Unless you really like golf.  

Don't get me wrong: we have lots of amenities I love.  Our bikeshare program is probably the most successful in the country, and I use it all the time.  Our public transit is very good compared to most cities.  Our tree-lined blocks of rowhouses are lovely.  Our food trucks are getting better every day.  And there is an intellectual smorgasbord of policy lunches, coffees, and evening lectures, most of it open to the public.

But these are amenities for DINK strivers with a slightly hippie bent, not the global elite looking for somewhere to park the limo for a few months every year.  Are they really going to pay millions for an apartment so they can be closer to the Cato Institute and the Center for American Progress?

DC is a very fine city to live in if you enjoy socializing with wonks and nerds.  It's great if you love politics.  And the bureaucracy gives it a stable, almost aggressively middle-class vibe that has its own charm.  But having grown up in Manhattan, I'm quite skeptical that it is going to attract the class of people who have bid New York real estate into the stratosphere.  

That's why I think that ultimately, DC home prices are mostly going to grow along with DC incomes.  Those incomes are doing quite well right now, and Layman is right that those who are connected in some way to global information markets are doing quite well indeed.  But I don't see them growing at double digits every year.