As anyone who owns a house will tell you, all property markets are, ‘local.’ Location is key. Nonetheless, when looking for indicators of a change in sentiment with regard to asset prices in general, residential real estate lends support to equity bull markets. Whilst it usually follows the performance of the stock market, this time it may be a harbinger of austerity to come.

The most expensive real estate is to be found in areas of limited supply; as Mark Twain once quipped, when asked what asset one should invest in, he replied, ‘Buy land, they’re not making it anymore.’ Megacities are a good example of this phenomenon. They are a sign of progress. As Ian Stewart of Deloittes put it in this week’s Monday Briefing – How distance survived the communication revolution:-

In 2014, for the first time, more of the world’s population, some 54%, lived in urban than rural areas. The UN forecasts this will rise to 66% by 2050. Businesses remain wedded to city locations. More of the UK’s top companies are headquartered in London than a generation ago. The lead that so-called mega cities, those with populations in excess of 10 million, such as Tokyo and Delhi, have over the rest of the country has increased.

Proximity matters, and for good reasons. Cities offer business a valuable shared pool of resources, particularly labour and infrastructure. Bringing large numbers of people and businesses together increase the chances of matching the right person with the right job. The scale of cities improves matching in other areas, from restaurants to education and the choice of a partner. Scale, in terms of the number of businesses, tend to stimulate competition and productivity.Nor has technology fulfilled its promise to work equally well everywhere. By and large, technology tends to work better in urban areas than the country.

Urbanisation facilitates learning and the diffusion of knowledge, two vital processes for the modern economy. Workers in cities can more easily change jobs without changing homes, enabling the transfer of ideas across businesses. On-line learning has supplemented, but shows few signs of usurping the classroom, lecture theatre or face to face contact. Despite the collapsing cost of communication, competition for entry to the best schools and universities has intensified in the last three decades.

For all the transformative effects of the communication revolution the lead that cities have over the rest of the country seems to be widening. The LSE reports that in the UK workers in urban areas earn 8% more than those elsewhere; in London the premium is 24%. Buoyant property prices in major cities underscore the gap.