The housing affordability puzzle – is it really so puzzling?

Newspapers often reference the cost of buying a home in a global city. While the expense is significant for all generations, the majority of articles focus on how hard it is for the young, especially graduates, to take their first step on the property ladder.

Despite the cost, there are sound reasons why global cities continue to attract young professionals. We would argue that it’s misguided to focus on the high housing costs; being located in a global city is good value.

Expense

The problem in a picture: If you had US$1 million, what would it buy you in different cities around the world? The answer is not very much.

In our view, though, this chart misses the point. In the knowledge economy, being in the right place has never been more important, even if that means putting off buying a home.

The importance of urbanisation

2008 was the first year that saw more people living in urban areas than rural areas.   The dramatic growth in city-living is why urbanisation has been called the most defining trend of the 21^st century.

The demand to be in cities comes from the move in the global economy from manufacturing goods to ideas.

In Richard Florida’s book, ‘The rise of the creative class’, he describes how the creative ethos is a significant factor in a city’s success. His thesis is that the economy is transforming and creativity is the 21^st century’s equivalent of the industrial revolution in the 19^th century.

This is explained by cities being similar to data networks, in that they both benefit from scale.  Cities are a rare ‘organism’ that becomes more efficient as it grows larger. As the FANGs (Facebook, Amazon, Netflix and Google) and the BATs (Baidu, Alibaba and Tencent) can attest, the more information they have, the more useful that data becomes, which in turn attracts more use for their services. Successful cities work in exactly the same way. 

The creative boom is taking place in cities and the self-fulfilling success of certain cities is not lost on people looking for employment in creative industries. One of the reasons that prices are so high, is that demand to live and work in these select cities remains robust.

Industrial revolution to tech disruption – the increasing importance of cities

Perhaps the real birth of cities, as we know them today, occurred during the industrial revolution.  The advent of postage, telephones, lifts and the railways resulted in a speed of economic growth not witnessed before. The more people, industry and knowledge clustered together, the more powerful the interactions became. This created more ideas and profit, attracting more people (the talent).

 It was clear that the more powerful a city became, whether it was political, economic or cultural, the more important it was for people and business to be located there.

During the industrial revolution, professional services (solicitors, accountants, traders) clustered in cities, while manufacturing could remain physically remote, such as in the cotton towns around Manchester.

The decline of manufacturing physical goods resulted in the new industry - manufacturing ideas. We live in the age of disruption. Cities are one of the greatest beneficiaries of the disruptive economy, as they are the incubators of these ideas.

This is captured by our Schroders Global Cities Index which ranks the strongest and most economically vibrant cities around the world.

Living in a global city allows people, and in particular graduates, to invest in their career by accessing the most experiences, both professional, social and cultural.

This means that although living costs are steep, many see the trade-off as worthwhile. 

Is remote-working a threat to global cities?

The first point to make is that there is a distinction between remote working (working in multiple locations) and home working. There is often the quip that the ability to work from home will reduce the need to be in high cost locations. We see little evidence of this. 

Conversely, remote working actually strengthens the case for cities and, specifically, cities at the forefront of idea generation. The rise in business travel and co-working companies, such as WeWork, proves, more than ever, that people need to be in the creative loop.

Technology makes remote working possible. Fewer people now have a fixed work location. Working remotely does not mean working at home, although this is clearly possible. Remote working means being in knowledge-rich ‘brain clusters’ with the flexibility to be in an office, co-working or international location as needs dictate.

It is this demand to be in the centre of the action that has fuelled price growth in global cities and will continue to fuel that growth. We see the disruptive economy consolidating into fewer locations, as our article on “Meta Cities” outlines. In particular, we point to cities where universities and industry collaborate - two examples would be Cambridge in the UK and Boston in the US, both home to a thriving biotech scene – where employment demand for those with the right skills, exceeds supply.

Conclusion: good value rather than expensive?

The disruptive economy succeeds where ideas transfer; cities are key enablers of ideas. Cities with strong universities and transport infrastructure have a further leg-up relative to cities that have neither.

We think the better way of looking at these high costs centres is to ask whether true global cities actually represent good value, rather than assuming they are expensive? Voting with their feet, many see the cost-versus-career as a worthwhile trade-off.

For knowledge workers, the cost of living in a global city will provide ample reward later in their career, which is why the affordability puzzle is less puzzling than it might seem.

You can find further real estate insights on our Global Cities blog, where we share our latest views on trends affecting the the constituents of our Global Cities Index.