Expensive cities

A loyal Undercover reader writes:

Just wanted to ask if there is an economic explanation for the fact that real estate in cities in third world countries like India is often more expensive than in cities in the US. (Except for New York,and a few cities in California.)
Is there an explanation for this given the fact that purchasing power of people in India is far lower than in the USA? While India’s population is 1100 million compared to USA’s 300 million and the land area of India is around 20% of that of the USA, I don’t think that’s the reason for the high prices, as the situation in terms of density of population is not as bad as say Japan for example.

I did not have a satisfactory answer, except to wonder whether it is really true that real estate in third world cities is more expensive than in developed-world cities. Any thoughts?

Update: If I’d have known so many of you were already reading this blog, perhaps I’d have tried harder to think of an answer. Good comments below. And Felix Salmon has more.

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