Aziz Sunderji of Home Economics has come up with an interesting way of measuring luxury home sales. He starts by identifying the top-decile price in 2019 for a collection of metro areas (i.e., the top 10% of all home sales in a given market).
This means that if the top 10% of homes in a city sold for $1 million or more, then $1 million is the threshold for a home to be considered "luxury."
But to prevent general market inflation from skewing things over time, he then adjusts this luxury threshold according to how the entire market performed. For instance, if average home prices have increased by 30% since 2019, then the luxury threshold also increases by 30%. In our example, it is now $1.3 million.
Now what?
By definition, in 2019, exactly 10% of sales in a given market were deemed to be luxury. But because the luxury threshold moves in tandem with the general market, Aziz is then able to see if the luxury segment grew or shrank in a particular market.
If, for example, only 4% of home sales are now above the new trended luxury benchmark, well then this indicates a shift toward affordability, as opposed to luxury. To be considered luxury today, a home's value has to have grown faster than the average home in that market.
The result is the above chart, which shows three luxury outliers, and two in particular: San Jose and Miami. This illustrates that so-called "K-shaped" economy.
Cover photo by Charlie Lederer on Unsplash
Charts from Home Economics
Here is a chart that we have all seen many times before. This one is from a recent New York Times opinion piece called, "America Needs to Build More Housing" and it shows the relationship between home prices (the price-to-income ratio) and houses built (average housing starts per 1,000 households). In this scatter chart, the four quadrants are as follows:
Cities that don't build a lot of housing and are expensive (San Francisco)
Cities that don't build a lot of housing but are still relatively affordable (Chicago)
Cities that build a lot of housing and are affordable (Austin)
Cities that build a lot of housing but are still relatively expensive (Hilton Head Island)
This last quadrant has the fewest number of data points and a number of the locations are resort or second-home destinations, which have their own unique market dynamics. Similarly, the lower-supply cities, like Chicago and Detroit, have managed to maintain some degree of affordability by virtue of the fact that their population and economic demand haven't grown as quickly as in other cities.
But generally speaking, the correlation is as one would expect: more homes equals lower prices. It is, however, worth pointing out that not all homes are created equal. The cost and time required to build a low-rise, wood-framed house in the suburbs is not the same as building a high-density, reinforced-concrete tower in the city.
Still, we know that all forms of supply ultimately improve affordability in a market. With this in mind, how might one describe Toronto today? We've been told we're in the midst of a housing crisis, and yet there are lots of available homes on the market, both to buy and rent. Indeed, it's a buyer's and tenant's market. So what's going on?
Well, it's important to keep in mind that a chart like this represents a long-term historical average and that building new housing generally takes a long time (too long, I might add). Right now, we could describe the Toronto housing market like the proverbial "pig in a python."
The market is in the midst of absorbing a huge influx of completed supply and, as our chart suggests, this is having a deflationary effect on home prices in the short term. However, once this pig gets digested, there's absolutely nothing next in the pipeline to digest, and according to basic economics, we know exactly what that will mean for the market.
Cover photo by Artem Labunsky on Unsplash
Chart via the New York Times
It is worth reiterating that one of the main reasons the majority of people live in cities is because they would like to make money and improve their economic status. There are, of course, other reasons too, but making money is an enduring attractor. In Alain Bertaud's book, Order Without Design: How Markets Shape Cities, he famously argued that cities are, first and foremost, labour markets.
Because of this, the success of cities depends on their ability to harness talent and turn it into economic progress. New York City, for example, is the city it is today because it was the largest port of entry for immigrants. And because transportation costs were high at the time, people arrived in New York and stayed in New York to work and create businesses.
The same thing is generally true today in the San Francisco Bay Area. It is estimated that roughly 50% of all tech startups and 59 of the top 100 highest-valued unicorns have a foreign-born founder. (I'd love to know what percentage are Canadian graduates of the University of Waterloo.) These are immigrants looking for money and economic opportunity, and the local ecosystem is providing the right preconditions.
But if the preconditions for success disappear, people will start to both leave and not come in the first place. So, it's also worth reiterating that the fortunes of cities have always risen and fallen over a long enough time horizon. Here's a great excerpt from a recent Bloomberg article by Richard Frost and Mary Hui, talking about what "war-rattled Dubai can learn from Hong Kong's expat exodus."
Financial centers rise and fall with the tides of geopolitics. From the mid-1500s, the tiny Portuguese enclave of Macau served as the primary intermediary for trade between Europe, Japan and China. In the mid-1800s, it was displaced by Hong Kong, which Britain secured by defeating the Qing dynasty. Hong Kong, in turn, was overtaken by Shanghai in the 1920s, when its more glamorous though still Western-run rival became the wealthiest city in East Asia. Both were occupied by Japanese forces during World War II, and their expatriate elite were interned in camps.
Shanghai never regained its prewar status. After their 1949 victory in China’s civil war, the Communists seized foreign-owned assets, bringing an end to the dominance of one of Asia’s most prominent business dynasties — the Baghdadi-Jewish Sassoon family, known as the “Rothschilds of the East.” The exodus of wealthy Shanghainese to Hong Kong helped lay the foundations for the city’s modern-day revival as Asia’s leading financial hub.
But between the protests of the 2010s, the 2020 national security law, and the draconian pandemic lockdowns, in recent years, it did feel like Hong Kong might be at risk of losing at least some of its status as a global financial hub. According to the latest Global Financial Centres Index, Hong Kong is still ranked third, behind New York and London, respectively. But Singapore is nipping at its heels in fourth position.
Today, some are arguing that the current turmoil in the Middle East has broken the promise of Dubai as a stable, global financial capital where influencers roam freely on the beach. People are, not surprisingly, leaving in the immediate term, but will it be lasting? I think it's too early to be calling the fall of Dubai, but there's no question that this is a meaningful exogenous shock. Its real estate index fell 30% in two weeks.
History shows us that there are no guarantees. Preeminence exists until something happens, and then it doesn't. If this war becomes protracted, it will be a major problem for Dubai. Capital and talent want openness, stability, opportunity, and a favourable business environment (keep taxes reasonable and get out of the way). After all, it's arguably the main reason why people come to cities in the first place.
Cover photo by Sepehr Moradian on Unsplash
Chart via the Global Financial Centres Index