From Southern California to Shanghai and London, inflated real estate prices have evolved into a simulacrum for broader prosperity. In an era of limited income gains, growing inequality, political dysfunction and fading productivity, the conjunction of low interest rates and essentially free money for the rich and well-placed has sparked the construction of often expensive, high-density residential housing.

This heady period of rapid real estate asset inflation could soon be coming to an end, followed by a potentially nasty correction in high-density, high-cost, more urban core locations. Since the 2008 crash, centered in overpriced single-family housing, density has been the new mantra, a trend largely echoed in the media, academia and among the planning professions.

The notion that dense, expensive urban real estate would dominate the future rested on two assumptions. First, it was widely explained to developers that millennials would prefer to rent small apartments for the foreseeable future, padding the profits of the investor class. Second, it was assumed that money would continue to pour into elite Western cities from the newly rich of China, Russia, Latin America and the Middle East.

Today, both trends are diminishing. Millennials are getting older, and by 2018 more will be in their 30s — when most people seek out single-family homes — than in their 20s. We are already reaching “peak urban millennials,” as University of Southern California demographer Dowell Myers suggests, while the replacement generation, known as the “Z” or “plurals,” will be somewhat less numerous.

At the same time, high-end residential investors from the once booming BRICS countries — Brazil, Russia, India, China and South Africa — are, with the exception of India, now experiencing slower or negative growth. They are likely to be a far less reliable source of funds for high-end luxury housing.

Clear signs of new bubble

Many of the markets now under pressure — New York, San Francisco, Houston and Chicago — have benefited from inbound foreign investors. These sales are now slowing significantly. A recent study by real estate appraisal and consultancy firm Miller Samuels suggests that Gotham could face a glutted luxury market for the next five years.

Landlords in New York, faced with growing vacancies amidst expanding supply, have increasingly been forced to give concessions. Similarly, Manhattan’s little mini-me, downtown Los Angeles, which also has gained investment from abroad, now sees landlords offering free rent and other inducements in a market that may well be saturated.

Miami, another favorite market for foreigners, is suffering due to the declining fortunes in commodity-oriented countries like Venezuela, Brazil, Argentina and Russia. Once booming, condo sales are now declining, a situation made worse by increasing inventory. As prices drop and sales slow, more than half a dozen projects have been canceled.

Similarly, in some California markets, both in the Bay Area and Southern California, Chinese investors have accounted for upwards of 30 percent of all buyers. Now China, fearing an implosion of its own property bubble, has placed new restrictions on outbound investments.

Silver linings – if we don’t destroy them

In the short run, a property market slowdown, or collapse, would pose problems for established property owners, as well as those who work in the real estate sector. But a decline in prices could also help retain the millennial workers and young families now headed out of expensive regions like Southern California, where property prices, as I discussed in a recent report for Chapman University, have been increasing at three times the rate of incomes.

High real estate prices are often seen as validation of economic prowess by local boosters, but they also constitute a primary cause of increased poverty and declining social mobility. Instead of focusing on the creation of high-wage jobs and local business, political leaders seem to think real estate can drive the economy, a stance that seems far from sustainable in the long run.

More construction, of course, would be welcome, but it’s simply farcical to think that high-density housing, the only kind favored by Gov. Jerry Brown, can do much to relieve high prices. Due, in part, to higher construction costs, the new wave of apartments cannot accommodate working-class, or even middle-class, families without subsidies. Nor can affordability be reachable without scaling down regulation and speeding up permitting. Until these conditions change, California’s urban housing prices will remain 150 percent higher — or worse — than elsewhere in the country.

It’s time also to acknowledge that demographic trends are already shifting toward the housing preferred by families and people over 30: single-family houses, townhomes and townhouses. Aging millennials, already shunning Southern California, need both more reasonable prices and better jobs so they can qualify for a mortgage. In this respect, the prospect of lower prices would be far from a disaster. It could provide a window of opportunity for our region, and other high-priced areas around the country, to get back to a more sustainable reality.

Originally published in the Orange County Register.

Cross-posted at New Geography.