Interesting, but from what I gather in the news, this bit is only part of the story:

But this sort of wealth building is predicated on a never-ending stream of new people who are willing and able to pay current home owners increasingly absurd amounts of money for their homes. It is, in other words, a massive up-front transfer of wealth from younger people to older people, on the implicit promise that when those young people become old, there will be new young people willing to give them even more money. And of course, as prices rise, the only young people able to buy into this ponzi scheme are quite well-to-do themselves. And because we’re not talking about stocks, but homes, “buying into this ponzi scheme” means “able to live in San Francisco.”

From what I've heard reported about New York, SF, and other areas that are already ungodly expensive to live in, the uber-rich are buying homes and condos in these areas as investments only. There are palace-like dwellings whose owner never sets foot in them, as they're just there to accrue value.

The bubble won't just have to pop from the bottom when nobody can afford to live in an area, it'll have to pop when the rich people who keep demanding luxury development they never use but only invest in decide it's not worth it to them, either.

I almost think we just need to have them build a place called "Trendy Walled No Poors City" where they can build and buy all the unused real estate and accommodations they want while the cities where people actually need to live and work can go back to being a bit more affordable. If the rich want to play The Sims, they need to do it away from real people.

They should build it in an undersea dome.

A Rapturous idea!

"If the rich want to play The Sims, they need to do it away from real people." This is basically what I think NYC and California are.

Except a lot of the entertainment and tech industry feels compelled to center themselves there for some reason. I get it if the big studios want to have prestigious digs, but why, in this day and age of digital communication that makes one city as "close" as another, is it still deemed rational to force themselves (and their workers who can't afford to live nearby) to locate there?

I understand the problem -- I've been offered jobs in the major tech hubs and turned them down by telling them my current living standard and what they'd have to pay me to maintain that after relocating (owned 2k sqft house in nice area, 10min from work, etc). I know my privilege -- middle class, well educated, tech professional. I have the benefit of getting job offers from the other side of the country. Getting a financial buffer so you can move to a more reasonable place is a fantasy when you live paycheck to paycheck (been there). I'd love to say that people who can't afford to live there should move to somewhere more affordable but I know that isn't an option...yet. There are places that are starting to incentivize in an attempt to attract an employable population to what the hub-dwellers consider the middle of nowhere.

I really don't know how this kind of thing could be fixed otherwise. Housing in this country is all kinds of messed up -- my mortgage is less than my rent in a small apartment was, in a neighborhood nice enough that hipsters harass us for gentrifying the area (before development my neighborhood was a junkyard, not low-income housing), and they just built a second neighborhood next to mine closer to a commercial railyard where the houses are $200k more.

The problems of Los Angeles and San Francisco are fixable, if the political will to fix them could be mustered. Proposition 13 ensures that once you buy real estate, your property taxes will decrease in real terms over time due to them increasing below the real rate of inflation. Fixing Prop 13 would begin to make a dent in the problem of the price, because that inflates the price of real estate.

The other issue limiting the supply of new housing are land use regulations which do things like prohibit taller buildings/apartments, and discretionary review of nearly all development projects. The good news is that if you can get a project through, even with having to add affordable housing units and meeting the requirements of California's building code, these projects are profitable. It's getting past the NIMBYism that is the hard part.

But all of this would drastically reduce the real estate values for people who are already land and homeowners. So you do have to ask people to vote against their own financial self-interest.

New York's real estate issues are largely due to the fact that it's supply of land is fixed, it's a global center of international commerce, and it's already very built up already. There are limited directions in which to expand. So you have a relatively fixed supply, a near constant influx of new entrants, and other cost drivers.

I suspect we won't see the pop for a long long time. SF, NYC and LA will become more and more like Times Square, a place for tourists and vacation rentals. AirBnB will make sure those investments continue to hold value.

I don't think these ever see AirBnB rentals.

But here's a weird thought: It's not too many steps from building a mansion/condo you never live in to building a pyramid full of things you want in the afterlife. At least, that's what I figure future archaeologists will think when they dig up these pristine, unused, troves of luxury.

There's a not insignificant part of my brain that is always thinking, "The Egyptians were right. Everyone dying now is living as slaves in the afterlife. You need to bring your stuff with you."

I'm also reminded of the evidence that too many elites can destroy a culture like the Maya:

Dr. Demarest has also explored the causes for the rising militarism and speculates that it could have resulted from a case of too many chiefs. It was probably not a general population explosion that contributed to the collapse, as has been conjectured, but a sharp increase in the elite population.

"Too many noblemen were competing for power," Dr. Demarest said. "Princes are expensive. Everyone has got to have a palace, jade and expensive dress. They compete for nonutilitarian, status-reinforcing goods and for warriors to fight their wars. They tend to be selfish and think only of the short term."

Dr. Demarest paused, then suggested an analogy between the Mayas and contemporary American society. "You might say we have a too-many-elites situation ourselves," he said. "Nobody wants to be blue collar anymore."

Who will survive the Limousine Wars? The Battles for Bling? The Bloodening of the 18th Green?

Weren't the Crusades also a way to burn off excess nobility?

I have some friends who bought a "starter" house about 10 years ago. Nice middle income neighbourhood. Now they have two kids who are in grade 1 and 3 and they started to think about selling and getting something a little larger. At the moment, their two girls are in the same very small room.

They got an appraisal and the value of their home has increased quite a bit and with the equity they have earned, they will have a sizable down payment available... but the catch is...

...even with the equity they can draw upon and the increase in value of their home.... the cost of every other home has risen just as much or more relative to theirs so they can now buy a starter home (albeit, with a larger down payment) ...

I know a girl that got divorced around 2009 and had the opposite issue. She wanted to hold onto her house, rather than accept the current value of the house. I had to explain to her that it's not just her house that dropped in value, it was all the houses. If/when houses increase in value, there would be a lot more upside if she cashed out and purchased something better. It's very difficult for people to accept advice like this, because there is an emotional attachment and most likely it's the main source of a person's wealth.

She got out of her house, lived with her parents, and ended up marrying a decent guy that owned a condo. They later upgraded and bought a house that needed some work. The lady who sold their house was looking to downgrade, but was having trouble finding a house within her price range. They sold the condo to her, for less money than then wanted. Funny how the world works sometimes.

I have been saying the bubble in toronto will burst for the last 15 years. I expect to be right eventually

http://www.huffingtonpost.ca/2014/04/18/house-prices-toronto_n_5174437.html

Toronto's largest problem is Chinese buyers. Chinese buyers keep buying up real estate and treating it like a commodity. Rather than rent out the house, they will leave it vacant. Treating housing like a commodity always seemed strange to me, the wealth from real estate should be rent, not appreciation.

Ummm... no. They are inconsequential and have no real impact on the housing market.