Why psychology is the secret ingredient in the success of global cities
Real estate investors may not be aware of the impact psychology can have on cities.
Our recent blog on the affordability puzzle highlighted that a key driver for young graduates moving to global cities is their future earnings expectations. It is clear that the cost of buying a home will not put off young graduates relocating to a successful city. While investing in your career is important, it is not just financial benefit which is driving urbanisation.
Psychology is another significant, and perhaps overlooked, factor contributing to the self-sustainability of global cities.
The model to understand the relationship between personality and academic behaviour uses the ‘big five’ personality traits. These five domains have been found to account for most known personality traits. Whether we like it or not, psychologists will put each of us into one of these categories:
Global cities are driven by ‘openness’
It’s the first of these five categories that has most significance for real estate investing.
The growth in cities, especially their economic power, is due in part to the talent that is attracted to them. As curious and talented minds move to a city, they increase the innovation and economic growth which occur there. This in turn creates more opportunity within the city and attracts more talent – the self fulfilling prophecy of urbanisation.
A paper written last year by academics at the University of Cambridge1 reinforces why the success of cities is self-sustaining. The paper focused on the psychological drivers of graduate migration and analysed the personality traits of individuals, to see if this helps explain where people live.
The paper clearly demonstrated that the personality trait of ‘openness’ has played, and will continue to play, a crucial role in the growth of cities and urbanisation as a whole.
The knowledge economy
Reading a standard definition of what ‘openness’ means helps to understand why people with this trait can contribute so much to a cities’ growth:
“Openness to experience’ is characterised by appreciation for art, emotion, adventure, unusual ideas, curiosity and variety of experience. Openness reflects the degree of intellectual curiosity, creativity and a preference for novelty and variety a person has,” according to Wikipedia.
The fact that open-minded people can drive economic growth is supported in Richard Florida’s popular book, ‘The rise of the creative class’. It describes how the creative ethos is increasingly dominant and a significant factor in a city’s success. Florida’s basic thesis is that the economy is transforming and creativity is the 21st century’s equivalent of the industrial revolution in the 18th century. Creativity will drive future economic growth, and cities that succeed will attract the creative classes.
With this in mind, it is clear that anyone who has personality traits which include “intellectual curiosity, creativity and a preference for novelty” will be highly sought after.
‘Openness’ reinforces the self sustaining success of a city
Not only will individuals with ‘openness’ traits be in more demand from employers but it seems that their lives can also be less stressful. Psychological studies appear to show that graduates with high levels of openness find migration less stressful and see less of a loss to their quality of life. They are therefore likely to be more mobile.
In the UK, data shows that creative arts graduates and the top graduates from the best universities are more likely to migrate to cities.
The majority of real estate investors will be unaware of how influential psychology has been to the returns they have achieved, by driving demand for real estate in certain cities. A personality trait is a difficult factor to build into a financial model. However, with every step we take to understand what drives urbanisation we become more convinced on the durability of global cities.
1. Openness as a driver of graduate Migration’, written by M. Abreu, M. Jokela and P.J. Rentfrow↩
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.