“The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.” - UBS

Last week UBS released its 2017 Global Real Estate Bubble Index. At the top of the list was none other than Toronto, followed by Stockholm, Munich, Vancouver and Sydney. And at the bottom of the list was Chicago – a city that UBS feels is undervalued.

Here is the full list of index scores:

The UBS index is a weighted average of the following five sub-indices:

1. Price-to-income
   

2. Price-to-rent (fundamental valuation)
   

3. Change in mortgage-to-GDP ratio
   

4. Change in construction-to-GDP ratio (economic distortion)
   

5. Relative price-city-to-country indicator
   

If you look at their price-to-income benchmark in isolation, Toronto drops down to the middle of the pack along with Geneva and San Francisco. Hong Kong, London and Paris sit at the top with the most unaffordable housing. 

Still, UBS credits “an overly loose monetary policy”, foreign demand, tight zoning, and rental market regulations for the eroding housing affordability in Toronto and Vancouver.

One of the challenges, of course, is that the capital flowing into real estate is not all local – it’s also global. And many cities around the world are seeing high price-to-income multiples, perhaps because of that. 

So exactly how much decoupling from local fundamentals should now be considered reasonable in our globalized world? And to what extent is this a result of “superstar economics?”

Here’s an excerpt from the UBS report:

The economics of Superstars explains why, in some professions, show business for instance, “small numbers of people earn enormous amounts of money and dominate the activities in which they engage.” By analogous reasoning, prices in the most attractive cities are expected to outperform average cities or rural areas in the long run. Hong Kong, London and San Francisco are exemplars of this theory.

The intuition is that the national and global growth of high-wealth households creates continued excess demand for the best locations. So, as long as supply cannot increase rapidly, prices in the so-called “Superstar cities” are supposed to decouple from rents, incomes and the respective countrywide price level.

I guess this is one of the reasons why bubbles are proven after the fact. If you would like to download a copy of the full UBS report, click here.

The Gehl Institute has just launched (in beta) something called the Public Life Data Protocol. It was developed by the Institute, as well as by Gehl (the practice), the Municipality of Copenhagen, the City of San Francisco, and Seattle’s Department of Transportation.

The goal of the protocol is to improve the way in which we collect, share, and compare public space information. It is about improving public life in public spaces.

To do this, they have proposed a series of metrics that measure everything from “posture within the space” to “objects brought into the space.” They also propose spatial metrics that help to analyze public life in relation to its physical context.

Gehl is a real leader in this space. I commend them on opening up their methodology and working to create “a common language for people data.” Great data will only help us to build more human-centered cities.

To download a full PDF of the protocol, click here. 

Photo by Thaddaeus Lim on Unsplash

I had a friend ask me this week about how I decide what to write on this blog. His comment was that I tend to write about a variety of different topics. He wondered: Isn’t it better to focus on one particular niche?

The simple answer is that I write about what interests me. And secondary to that is any concern around what will get the most clicks. In fact, I try not to fall into the trap of worrying about the latter. Sometimes it can be paralyzing to fixate on what will appeal most to the tens of thousands of people who read this blog on a regular basis.

The reality is that my interests are much broader than, say, just design and real estate; though these two topics are clearly central. 

I learned a long time ago while studying architecture and art history that what we make as a society is generally a product of the cultural milieu at the time. In other words, the built environment doesn’t happen in a vacuum. It is the physical manifestation of what we believe to be true at a particular moment.

Today, it’s pretty hard to ignore the importance of tech. Think of some of the most valuable companies in the world right now: Apple, Google, Amazon, Facebook, and so on. Now, technology has always shaped our cities, but what makes this moment different is the decisive shift toward software.

It’s arguably no longer about who can build the best mousetrap. It’s about who can build the best software layer on top of that mousetrap.

In 2011, venture capitalist Marc Andreessen (previously the co-founder of Netscape) published a widely shared essay called, “Why Software Is Eating the World.” And over the past 6 years he has been proven to be very right.

The 3 main points he aimed to make with that essay are as follows:

1. Every product or service that can become software will become software.

2. Every company will have to become a software company.

3. The winning companies will be the best software companies.

Depending on your industry, this may sound ludicrous to you. Certainly in 2011 it probably seemed that way. 

But a perfect example of this phenomenon is the iPhone. The phone itself is manufactured in China, albeit where a lot of great hardware innovation is taking place. 

But at this point, phones have become fairly commoditized. The profits that Apple makes from the iPhone disproportionately come from the software layer and the app ecosystem it has developed.

You could make a similar argument with Tesla. Autonomous navigation – which most of us can agree will have a profound impact on cities – is largely a software challenge. 

And so if you believe that autonomous vehicles will be a fundamental part of the future of mobility, then it’s not that hard to believe in point number three: the winning car company will also have to be the best car software company.

Some industries have been less touched by tech and software – real estate being one of them. But if Andreessen is right and it’s not a question of if, but a question of when, then it behooves all of us to think about the potential impacts.

I love how Andreessen ends this podcast discussion with Barry Ritholtz of Bloomberg and so I’m going to repeat it here to close out this post. He says: “There are no bad ideas. There are only early ideas.” 

And that’s why I write about tech on my city building blog.

Photo by Michal Pechardo on Unsplash