Interesting Facts About The New York Real Estate Market

If you live outside New York, you probably pay little attention to the New York real estate market. But if you look into New York real estate a little, it can offer some interesting insights into how the world works.

For example, a notable phenomenon of the past few years in New York has been the construction in a certain area of midtown Manhattan of a cluster of super-expensive, super-luxurious, and in many cases "super-tall" new condominiums.  The location in question is the area immediately South of Central Park, from about 53rd to 59th Streets, between about Park (fourth) and Eighth Avenues.  (This is an area of maybe 0.2 of a square mile.)  Some have taken to calling this area "Billionaires' Row."  Several of the new buildings reach to 1000 feet and more in height.  Prices can be $5000 or even $10,000 or more per square foot, meaning that an ordinary two-bedroom apartment can go for as much as $10 million, and larger apartments can go well into the eight figures.  

Who buys these things?  The answer, to a substantial extent, is absentee foreign buyers who often do not actually move in, and instead use the apartments as investment vehicles.  The apartments sell for enormous sums, and then sit there mostly vacant.

The normally sensible Steve Cuozzo of the New York Post has an op-ed on this phenomenon in today's edition.  Unfortunately he seems to have found it necessary to work into his commentary a dose of the usual New York anger and resentment:

Who’s coming to the 92nd and 93rd floors of 432 Park Avenue, which boasts that it’s the “tallest residential building in the world?” An “anonymous Chinese buyer” recently purchased three combined penthouses for $91.1 million. . . .  Our beloved, global-icon Midtown Manhattan skyline has been hijacked by obscenely rich global drifters. . . .  The under-construction “Central Park Tower” on West 57th Street, which aims to sell $4 billion worth of apartments, will rise taller than One World Trade Center minus its antenna. More are going up including 111 W. 57th St. and 53 W. 53rd St. . . .  [W]e should resent towers that are mainly designed to make their developers a killing on absentee foreign buyers — some who buy them merely to flip later for higher prices, others who take years designing “dream homes in the sky” but never move in.

OK, what can we learn from this phenomenon?  Here are a few items:

  • The elite of some seemingly rising new world powers certainly seem to be planning their exit strategies.  Without doubt, China is at the top of the list.  Also up there on the list are Russia and some of the Middle Eastern petro-states.  When somebody high enough up in the nomenklatura of China finds it necessary to plunk down close to $100 million on a hard real estate asset in Manhattan, you have to wonder whether the bigwigs over there think that the current power structure is going to last for the long term.  And by the way, it's not just Manhattan that's on the receiving end of fleeing Chinese capital.  Vancouver, Canada has been completely swamped by the same phenomenon, and this article from the Huffington Post in July 2017 indicates that Toronto and Montreal are also on the receiving end of huge Chinese real estate investment.  Other big destinations include London, Switzerland and Singapore.  (Note: capitals of capitalism all.)
  • Next time you read the likes of a Thomas Friedman telling you that the Chinese with their soft authoritarianism have figured out a better governance model than our contentious mess, ask yourself, how many American billionaires are buying hundred million dollar condos in Beijing as a hedge against political instability over here?  The answer is, none.
  • This real estate investment is one small piece of the flip side of the "trade deficit."  You may find it odd that people buy apartments that they don't intend to live in any time soon, but building them does provide a good deal of high paying work for American construction workers and salespeople.
  • But isn't New York a super-high tax jurisdiction?  Why would these international billionaires volunteer to pay ridiculously high New York taxes?  The answer is, they don't.  New York's income taxes are super high, but they only apply to either (1) income earned in New York (which these international billionaires have little or none of), or (2) all of your income if you are "domiciled" in New York (meaning, it is your principal home and/or you spend 183 days or more per year here -- again not applicable to the international billionaires).  Thus, essentially none of these international "ghost" buyers pays any substantial amounts of New York income taxes (or federal income taxes for that matter).  They do pay New York real estate taxes on the apartments, but those are remarkably reasonable by national and international norms, mostly as a result of the high income taxes paid by those who actually live here.

So to Cuozzo and others who somehow feel the need to be angry at foreign buyers of luxury real estate, I say, relax.  Lots of New Yorkers make money off them, from the people who sold the land for the condos, to the developers, to the construction workers who built the buildings, to the salespeople who sold them.  The City gets not insignificant amounts of real estate taxes (one of these buildings can generate tens of millions of dollars per year).  And then there are the retailers and the Broadway shows and the museums that get business when these high rollers make their occasional visits to our city.  What's not to feel good about?

All of this, of course, involves just a tiny piece of the overall New York residential real estate market.  The biggest part of that market has long been rental housing subject to rent regulation.  The consequence of pervasive rent regulation for decades was a very low vacancy rate (often reported as below 1%) that made it difficult to impossible for new people moving to the city to find a place to live.  When I moved to New York in the 1970s, vacancies were extremely rare, and apartments difficult to find, even as the city's population was plunging by almost a million people during that decade.

The rent regulations were loosened some during the 1990s, including allowing for decontrol on vacancy in some instances, and some other methods for getting some apartments, little by little, out of the price control system.  (I won't go into the details here -- way too complicated.)  Here we are now, twenty plus years on.  Are we finally getting back to a normal real estate market for everyday renters?

The Wall Street Journal reports on this subject in a March 8 article by Josh Barbanel titled "New York Housing Is Getting (Gasp!) More Affordable."   It seems that the Census Bureau does a survey of housing vacancies in New York every three years, and a preview of the most recent survey (not due out until June) was just provided to the City Council.  The big news:  Vacancy rates are finally making their way into the normal range:

The vacancy rate was 3.63% across the city, the report found. . . .   The vacancy rate in Manhattan for all types of housing was 4.73%, the highest in at least a decade. In the city as a whole, the rate was 6.07% for market-rate housing, and 8.74% for all types of housing renting for at least $2,500 a month.

How did this happen?  Mainly, through lots of construction:

The Census Bureau survey, conducted in the first half of last year, found a record 3.47 million housing units in New York City, an increase of 117,000 since 2011. More than 35,000 additional rental apartments and 15,000 condominiums are due to open in 2018 and 2019, according Nancy Packes Data Services.

And the effect of gradual deregulation followed by increased construction?  Increased affordability!

Housing costs are taking a smaller bite out of the typical household’s monthly budget, according to a new U.S. Census Bureau survey that is conducted every three years.  

Who would have thought this could ever happen?