Our superstar cities

Our superstar cities
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First Published: Tue, Jan 08 2008. 11 20 PM IST
Updated: Tue, Jan 08 2008. 11 20 PM IST
Does the real estate listing in your newspaper make your heart sink? It now costs around Rs50 lakh to buy a small flat in most parts of Mumbai. Let’s assume—unrealistically, I admit—that a family that wants to buy a one-bedroom house in the city gets a loan for the entire amount. This family will have to shell out Rs50,000 or so every month to service the loan. It will also need at least another Rs20,000 to meet its monthly household budget. This means that any family earning less that Rs70,000 a month is unlikely to afford buying even a tiny flat in the city.
Hence the question: Will the relentless rise in house prices in our cities crowd out the middle class, which cannot afford to buy a house and which will refuse to stay in a slum?
Many other cities around the world have to struggle with the same question thanks to the global boom in real estate. New York mayor Michael Bloomberg said in 2003: “If New York City is a business, it isn’t Wal-Mart—it isn’t trying to be the lowest-priced product in the market. It’s a high-end product, may be even a luxury product. New York offers tremendous value, but only for those companies able to capitalize on it.”
Three professors from the Wharton School of Business—Joseph Gyourko, Christopher Mayer and Todd Sinai— have come up with the concept of superstar cities, in an academic paper published in June 2006. Their thesis is a simple one. Certain cities in the US have seen sharper increases in real estate prices than regular cities. Why? Gyourko, Mayer and Sinai believe this is because of two reasons. First, these cities have a disproportionate amount of rich people compared with other cities. Two, the supply of housing in superstar cities cannot be increased easily when prices rise; it is relatively inelastic. Also, there are few alternatives to these glamorous cities. They have unique attractions for the affluent and successful.
It’s not just a rich-world occurrence. In a new working paper for the World Bank, Robert M. Buckley and Ashna S. Mathema ask: Is Accra a superstar city? The capital of Ghana is experiencing the same sort of problems that our own cities are. Buckley and Mathema write about how “housing in Accra has become more expensive, and appears to be increasingly pricing middle- and lower-income groups out of the housing market, resulting in substandard and congested living conditions for a large majority of the city’s residents.” Sounds like our own cities, doesn’t it?
It is easy to work yourself into a moralistic fervour about this. And demand price controls on housing or the creation of subsidized housing stock. But these will lead to rent seeking and corruption rather than equity, as the few who get hold of subsidized housing are likely to trade it in the market for a profit sooner or later.
And that’s why I feel there is some truth in Bloomberg’s arrogant-sounding statement. Some cities will eventually support only high-value economic activity. We already see this happening in many cities around the world, as manufacturing has been replaced by financial services, tourism, education and other such activities as their main business.
High real estate prices should thus be an incentive for cities to change their own business models. But how does that fit into the other great Indian reality—urbanization? Millions move into the cities every year. Will ever-higher land prices condemn them to life in filthy and crowded slums?
Not necessarily. Robert Shiller of Yale University and one of the finest minds to write on real estate and housing economics doesn’t quite buy the superstar city idea.
One of his objections is to the assumption that land supply cannot be increased. “While there is only so much land in any one of the existing superstar cities, in every case, there are vast amounts of land where a new city could be started. And new cities are started, taking away from the “uniqueness” of existing cities. The best-known examples of such grand new cities are planned capitals… These include Brasilia (1950s), Canberra (1910s), Islamabad (1960s), New Delhi (1910s) and Washington, DC (1790s).”
I’m not sure that showpiece cities to house the nation’s bureaucrats are necessarily the correct examples. However, Shiller’s larger point is worth taking seriously. The way cities can be made more affordable for all is to increase the effective supply of urban land. And one way to do this is to build new cities.
It is unfortunate that so much of the urban debate is consumed in fiery anger against builder lobbies and redevelopment controversies. The really interesting long-term solution is for India to build a hundred new cities with public-private partnership.
It would be a good idea to start discussing how we can go about it.
(Your comments are welcome at cafeeconomics@livemint.com)
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First Published: Tue, Jan 08 2008. 11 20 PM IST