The dispersion in house price and income growth rates across locations and the skewness in house prices, especially the strong growth in the right tail, can be explained in part by inelastic land supply in some places combined with growth in the high-income population. The view that some cities and towns have turned into scarce luxury goods, which we label superstar cities, is supported by a number of consistent empirical facts.
As always, there is supply as well as demand. Supply (development) constraints are favored by planners (who also worry about housing affordability); these days, demand comes in great part from the newly rich from around the world. They like to hang out in London, Paris, New York, etc. These places are a lot more fun than St. Petersburg and points east. Foreign policy sanctions experts in Western capitals might take note. Keep oligarchs from traveling to their favorite playgrounds.
The New Yorker's James Surowiecki invokes the superstar city story to explain high housing costs in Vancouver ("Real Estate Grows Global"). He ignores the supply side but notes that the demand side has been shown to be sensitive to turmoil abroad.
Surowiecki is at a loss re what can be done. Having ignored the supply side, he cannot suggest that planners and local officials should face up to the downside of their favorite land use policies. The only upside is the potential new weapon handed to New Cold War sanctions warriors.
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