From this week’s Business Week:

Economists have twisted themselves in knots trying to explain why housing prices in cities like San Francisco and Boston are so high. One theory says that the cities have better amenities. Another says that moving to these cities makes workers more productive (presumably because of the higher quality of their colleagues) so people will pay more to live there.

Lately, though, three economists from Philadelphia and New York have been pushing a completely different argument …

Simply put, a certain percentage of rich Americans would like to live for whatever reason in, say, San Francisco. But at some point, there’s no more room to build there. So the arrivistes have to pay a premium to move in. Prices go up …

What goes for San Francisco goes for other superstar cities such as Los Angeles, Boston, New York, and Seattle, say the authors …

The authors sum it up this way: “Living in a superstar city is like owning a scarce luxury good.”

Hmmm. Well, this writer’s blog entry sure made me feel wealthy and privileged, I don’t know about you. And, I only own a one bedroom apartment!

Full story: San Francisco, Boston, and Other ‘Superstar Cities’ - By Peter Coy, Business Week, by way of Matrix - By Jonathan J Miller

Original study: Superstar Cities (.pdf) - By Joseph Gyourko & Todd Sinai and Christopher Mayer