Billion to One

We Need More $88 Million Apartments

New York, London, and other playgrounds for the rich should keep building homes for the billionaire class.

Dmitry Rybolovlev and his daughter Ekaterina Rybolovleva.
Ekaterina Rybolovlev, daughter of Russian billionaire Dmitry Rybolovleva, is the proud owner of an $88 million pied-à-terre in New York City.

Photo illustration by Juliana Jiménez Jaramillo. Photos courtesy of Hemera Technologies/Getty Images/Thinkstock

A billionaire might be anywhere at any time, riding away on his private jet. But for day-to-day purposes, 30 percent of billionaires reside in just 20 cities. Moscow is No. 3 on the list, primarily because Russia’s corrupt privatization process in the 1990s was the font of so many fortunes. But New York at No. 1, Hong Kong at No. 2, and London at No. 4 are home to so many of the super-elite for a more complicated mixture of reasons. In part, these are simply financial centers where it’s possible to get rich. But more fundamentally, these are cities where rich people like to move: English-speaking, cosmopolitan, big enough to be anonymous, and with an essentially limitless range of high-end services.

It’s a niche that attracts mixed reviews. Soon-to-be-former New York Mayor Michael Bloomberg offered a somewhat bizarre exit interview to New York magazine in September in which he waxed enthusiastic about his fellow billionaires. After all, billionaires pay lots of taxes. “All I know is from the city’s point of view, we want these people, and why criticize them?” he asked. “Wouldn’t it be great if we could get all the Russian billionaires to move here?”

In more mainstream quarters, the influx of billionaires to New York is viewed as a threat. A May article in the New York Times about luxury construction featured many quotes from people fretting that the mania for high-end units would leave the city denuded of middle-class housing stock. Who, exactly, was buying these places? Nobody knew for sure, the Times’ Charles Bagli wrote, but “it is likely that many are the rootless superrich: Russian metals barons, Latin American tycoons, Arab sheiks and Asian billionaires.”

In truth, becoming a billionaire hot spot is an enormous opportunity—in theory. But in practice, it’s often squandered by bad policy.

Consider luxury cars. Nobody in Germany thinks it’s bad that rich people like to buy fancy cars from BMW, Mercedes, and Audi. On the contrary, the popularity of those luxury brands is one of the pillars of the German export economy. And if really rich people swoop in and start demanding more and more of the highest-end models, then so much the better. Those M’s, AMG’s, and S’s just create even more value for the car companies, their workers, and their suppliers. Nobody worries that ordinary Germans are going to be stuck taking the bus because all the nicest cars are being exported to Russia. If demand rises, you build more factories. And some factories can make Porsches for fancy people while others make Volkswagens for regular folks.

The problem only arises if for some reason you can’t build more cars.

We have some insight into how this works from the days of the Reagan administration, when threats of legal action against Japanese automakers led to the imposition of “voluntary export restraints” by Japanese producers. These de facto quotas on how many cars Toyota, Honda, and Nissan could sell raised prices and pushed some consumers to buy American cars. But they also led to a change in strategy by Japanese automakers. If you can only sell a handful of cars, you’d better make sure they’re expensive. So Toyota launched a luxury division, Lexus. Honda and Nissan followed suit with Acura and Infiniti. If the export quotas had never been lifted, over time these luxury brands would have grown to account for 100 percent of Japan’s bound-for-America production. This is essentially where New York, London, and other playgrounds of the rich find themselves today.

Unlike cars, residential buildings have to be in specific places to be valuable. And zoning codes often restrict how much you can build. Most cities in Europe and on the American coasts sharply restrict how much new supply is allowed, at times leading a frighteningly large share of it to go to things like an $88 million pied-à-terre for the daughter of a Russian billionaire.

But the right response isn’t to freak out; it’s to take advantage of the potential bonanza. America’s greatest export product is America itself. Whether it’s apartments in Manhattan or beachfront condos in Miami and San Diego, the rich people of the world want to buy dwellings on our shores. If we allow for more building permits and denser construction, there’ll be a jobs boom exporting those homes just as Switzerland exports fancy watches or Gulfstream exports private jets. The houses will have to be filled with furniture and appliances and other manufactured goods, and when their owners come to visit, they’ll also visit our stores and restaurants. And, yes, as Bloomberg said, they’ll pay property taxes. A natural swap would be more building permits in exchange for eliminating the tax subsidies that finance so much of today’s development. Unfortunately, by rejecting a recent proposal for rezoning Midtown East, the New York City Council took a step in the opposite direction.

Still, cities where the super-rich want houses should find ways to accommodate them. The key is to let more development happen in the in-demand, centrally located areas where the economic benefits are largest and the ecological costs the smallest, not just “transitional” neighborhoods and the exurban fringe. Take the existing stacks of apartments for rich people and replace them with taller stacks. Then watch the money roll in.

Correction, Nov. 21, 2013: Due to a production error, the caption on the photo in this article misstated the owner of the $88 million apartment. It is Ekaterina Rybolovlev, not her father.