Real estate in New York has not always been overpriced. Seventeenth-century Dutch merchants are said to have bought the whole of Manhattan island from the local Native Americans for 60 guilders—less than $1,000 in today’s money. Since then prices have risen relentlessly. That $1,000 will now get you 15 sq ft of Midtown office space—for a single year.
Such prices may seem absurd, but they are not. A recent study by UBS found that although London and Hong Kong are at risk of a housing bubble, New York prices are “fair value”. The S&P Case/Shiller home-price index for New York is well below its 2006 peak. And there are reasons to believe that, in the long run, demand for property in the Big Apple will outstrip supply.
Some people assume that, since digital technology allows you to work anywhere, location will be less important in the future. If you can telecommute from a beach in Bermuda or a ski resort in Wyoming, why bother renting space in Manhattan?
In fact, the information revolution has had the opposite effect. The more companies depend on information to stay competitive, the more crucial it has become for knowledge workers to hang out with other knowledge workers. On that beach in Bermuda, you don’t bump into many peers to swap hot tips or bounce ideas off.
So the smartest people in the world are clustering more than ever into a select group of globally-connected megacities, of which New York is arguably the most attractive. Top college graduates flock to such places, to find the highest-paying jobs and—just as important—to find other high-achievers to become romantically entangled with. If you want to marry a future titan of Wall Street, there’s no point looking for him or her in Ohio.
Some observers worry that New York will be eclipsed by other financial centres such as London, Hong Kong or even Shanghai. This is not an unreasonable fear. The world’s centre of economic gravity is indeed shifting to Asia. And London is in some ways less aggressively regulated than New York—certainly, its prosecutors are less likely to hit companies with multi-billion dollar fines for offences the CEO may not even have been aware of.
But none of this means that Wall Street will wither, or that global firms will abandon Manhattan. New York has no serious rival as a financial centre in a similar time zone. And although America’s share of the global economy has fallen, it remains dominant in some areas. Its share of global investment-banking revenue is rising, and its share of global assets under management has jumped from 44% a decade ago to 55%. Neither the euro nor the renminbi is close to knocking the dollar off its perch as the world’s reserve currency.
So here are two real-estate themed predictions for 2016. One: Donald Trump will not be president. Two: New York property prices, like Donald’s hair, will continue to defy gravity.
Robert Guest is foreign editor at The Economist