Skip to main content

Superstar Neighborhoods and the Concentration of Wealth

The geography of income inequality is all about demand.
  • Author:
  • Updated:
Amsterdam. (Photo: INTERPIXELS/Shutterstock)

Amsterdam. (Photo: INTERPIXELS/Shutterstock)

In my discussion (post #1 and post #2) of the paper "Superstar Cities," I buried the lede. The abstract drops a bomb. Restrictions on housing supply, natural or artificial, help to explain the geography of income inequality:

Differences in house price and income growth rates between 1950 and 2000 across metropolitan areas have led to an ever-widening gap in housing values and incomes between the typical and highest-priced locations. We show that the growing spatial skewness in house prices and incomes are related and can be explained, at least in part, by inelastic supply of land in some attractive locations combined with an increasing number of high-income households nationally. Scarce land leads to a bidding-up of land prices and a sorting of high-income families relatively more into those desirable, unique, low housing construction markets, which we label “superstar cities.”

The term "superstar cities" is misleading. A few neighborhoods end up defining a "low housing construction" market as long as the other nearby neighborhoods do not offer a viable alternative. Supply, like demand, in the superstar cases really refers to geographic perception. Conceivably, the real estate market disequilibrium could be addressed via the debunking of place stereotypes about neighborhoods where supply by far outstrips demand. Instead of liberalizing zoning restrictions, a city struggling with gentrification pressure could build more bike lanes:

As the search for more affordable real estate in New York City pushes deeper into neighborhoods that were once considered out of the way, bicycle lanes are taking on new importance. Since 2007, the city has carved out more than 350 miles of bike lanes in the five boroughs, according to the Department of Transportation. As a result, the distance from the nearest subway or bus stop has become less of a drawback for the two-wheeled set, particularly in transit-challenged areas of Brooklyn like Red Hook, Greenpoint and parts of Bushwick. In a twist to the real estate catch phrase, location, location, location, brokers say, bicycling is beginning to influence some real estate decisions.

Gentrification patterns in a "filled up" city such as New York follow the transit links between the residential frontier and the global jobs that support high income households. Sever the tie between a neighborhood and employment, restrict the demand. Disable a Google bus.

Digression explored, none of the above is why the superstar cities paper is so interesting. Ryan Avent, about two years ago, for the Economist:

The San Jose metro, for instance, experienced a private employment rise of about 30,000 in the year to April, of which just over 5,000 came in "professional, scientific, and technical services", which includes some but not all high-tech employment as well as some things that aren't high-tech. In Houston, by contrast, private job growth amounted to 90,000 in the year to April on just 7,000 in professional, scientific, and technical services. Houston, in other words, got about twice as much private job growth out of its technical job growth in comparison with San Jose. If you repeat the exercise at the statewide level, for California and Texas, you get a similar ratio; Texas produces many more overall jobs for a given number of skilled, tech positions.

Spoiler alert, the reason Texas gets so much more bang for its high-tech employment buck is (Avent argues) an easier path to more building construction. Damn NIMBYs are killing the jobs multiplier. But the likes of Google won't move to Texas because it fancies the talent pool available in Greater San Francisco. Naturally, the solution would be to make California regulations more like the ones in Texas. Give the green light to more real estate development in places where talent wants to be.

Deregulation addresses the supply side of the equation. On the demand side of the equation are the cities and neighborhoods that have fallen off the mental map of global labor. Amsterdam is dying:

Yet as she acknowledges, a new, higher category of cities may now be emerging: global capitals. Amsterdam has risen but New York, London and Hong Kong have risen faster. The Dutch elite is moving to Amsterdam; but many ambitious Dutch people no longer want to join the Dutch elite. They want to join the global elite. That often requires moving to a global capital.

You see this shift in many professions. London is full of Dutch bankers earning more than their friends in Amsterdam ever will. Dutch academics and even journalists increasingly seek careers abroad. Ambitious Dutch politicians are getting disillusioned with the shrinking national scene too: before the European elections, party campaign posters on Amsterdam’s windows bemoaned the power of Brussels. The national-global divide is now so stark that many children of the Amsterdam elite make the leap in their teens: they study either in Britain, or in English at a Dutch university. You can’t crack the global elite speaking Dutch English.

Of course, small countries have always exported ambitious people. Years ago a New Zealand friend, in a lowly job in London, told me that his country’s next prime minister had asked him to be her aide. “Fantastic!” I said. “Oh, I won’t do it,” he said. Working for New Zealand’s prime minister, he explained, was a bit like working for Leicester city council.

Emphasis added. The deregulation of zoning will allow more people with global elite ambitions to move to a global capital. Suck it, Amsterdam. Give the aspiring global elite what they want. But the idea that one has to live in London as opposed to Amsterdam is a fiction, a social construct that informs migration. And migration, on the demand side of the equation, is nimbler than deregulation and more construction:

“In the web world it’s a myth that everyone wants to be in east London,” says James Layfield, CEO of co-working hubs Central Working, which on May 7 launched his 20,000sq ft space in the old Wickhams department store building in Mile End.

Look north to Kentish Town or just as far as King’s Cross, where Google is moving its HQ. Look east to Stratford and even south to Croydon and you might just see the Java trails of coders scurrying off to cheaper grounds. After all, one of the biggest drivers in this shift is that the rent is too damn high. A report last month showed that the draw of tech to the area had nearly doubled the price per square foot in Shoreditch in the past three years.

“Rent is going up in Shoreditch and we need to be in Mile End before everyone else moves out that way, so that we can be the trailblazers,” says Layfield of his decision to go further east. Microsoft Ventures, the software giant’s start-up accelerator, has already moved into his Mile End space — and Layfield is predicting that it will quickly become its own cluster. “We will define the area as a tech hub, with 500 techies who will be going up and down the streets every day,” he says. “But it’s not just that the rent has got too high. It’s actually quite hard to find a space like this in Shoreditch any more.”

Instead of waiting for more supply in Shoreditch, tech firms migrate to neighborhoods where rents are cheaper and the kind of space they need is available. Once that avenue is played out, firms will leave Greater London for Manchester, Birmingham, or the Philippines. Gentrification of businesses or people is not about supply restrictions. It is about the social restrictions on the geography of demand.