The Effect of Increasing Local Wealth On New York Real Estate

It is no secret that luxury real estate in Manhattan has gotten astronomically expensive in the last several years. In the past, the high cost was attributed to a flood of money from foreign investors, but recently the story has changed. Findings suggest that the role and importance placed on foreign investors has been overstated. The actual force behind real estate sales can be attributed to local domestic deals and purchases, a majority of which can be traced to New York City residents.

Recent information regarding the income of New York City residents shows the impact of homemade millionaires as their incomes and numbers have grown. There has been an increasing number of New Yorkers found to earn about one million dollars or more per year. From 2013 records, about 21,764 taxpayers in this city earned one million dollars and above, giving about a 47 percent increase from the 14,795 recorded in 2009. This group of millionaires has seen a 48.6 percent bump in their incomes to 96 billion dollars over the past 5 years. Tax return data also shows that close to 45 percent of New York millionaires earn 2 million dollars or more per year, and that about 1,315 of them earn 10 million dollars or more in income.

There are a number of the factors leading to New Yorkers’ income increase, but chief among them are the 2013 changes in the federal tax law, which led to a dramatic increase in the number of rich New Yorkers. One obvious indicator of this is the significant increase in the city’s overall income tax collection, which has seen an 11 percent increase by the end of its 2015 (June) fiscal year.

The figures show that we New Yorkers are the major factor causing the increase in the cost of high-end real estate rather than those foreigner investors. The higher prices are now directly linked to New Yorkers themselves, many of whom are making millions of dollars per year. Foreign investors should get ready because the pace is now being set by New Yorkers.

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Luxury Real Estate Succumbs to the Law of Supply and Demand

The number of luxury apartments in New York City has seen a skyrocketing rise recently. For instance, there are almost 300 new apartments costing about $5000 per square foot located around a seven-block stretch of 57th Street that are either currently up for sale or will be very soon, most likely in the next 24 months.

Data on luxury real estate in 2013 shows that the volume of sales was about 55 transactions for the year. In the year 2015, however, data showed that the sales of luxury real estate closed at a lower rate of 47 transactions for the year - down by 8 transactions from just two years earlier.

Developers and brokers are expecting the number of transactions for this year to be even lower. This they believe is due to the slow growth of China’s economy, coupled with the falling prices for oil and other market commodities, causing ultra-wealthy investors to become more cautious about spending. This drop in demand is leading to a glut in the luxury market as prices for land, apartments, storefronts and hotel rooms have gotten too high. The result has been a sudden slowdown in the luxury market.

The dangers and risks of focusing solely on the super-rich have become apparent. Some developers have begun cutting prices while others are looking into dividing up larger units and selling them off as smaller apartments. Also, recent plans by one developer to convert a hotel into a luxury residential tower have been shelved.

The effects of the pursuit of oversized profits are already beginning to show. Retailers are beginning to take a step back as landlords around Madison Avenue have increased rents up to $2000 per square foot. The cost of occupancy is now through the roof, making profits more difficult to achieve for retailers. Some storefronts are may become vacant as occupants search for cheaper real estate elsewhere.

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A Downward Trend for Luxury Assets In New York

The year 2015 was a banner year for the ultra-wealthy. It was a year in which the rich set records for their luxury real estate investments and high dividends. For instance, a Manhattan penthouse was sold last year for a record $100 million, while a Picasso was auctioned for $179 million. With the start of the new year however, the situation seems to have changed dramatically. On the heels of record prices set the previous year has come a surprise reversal, where values of assets that appreciated in the just previous year have dropped, and we are now experiencing a downward trend. This has resulted in various price reductions, several auction deals going unsold and a growing inventory of unsold high end real estate.

There are a number of factors contributing to the sudden decline in the demand. Some of these include: the slowing Chinese economy, the prospect of increased interest rates in the US and the collapsing price of oil and other essential commodities. These factors are enough to make the high-spending ultra-rich from China, Russia and Brazil much more cautious.

The change has led some luxury real estate sellers in Manhattan to slash their prices. Despite several cuts and reductions, properties have been left unsold. Those that bought luxury real estate with the intention of flipping for higher prices this year are likely to be disappointed, as these investors have missed the peak of the market. This is evident in the sale of an apartment that was bought for 20.3 million dollars last year which is now being sold for a loss of 2.5 million dollars this year. While this situation illustrates New York’s present real estate market, there are similar trends in other cities of the world, especially in London which has experienced a notable decline in luxury properties sales.

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Aspirational Pricing: A Major Factor Slowing the Luxury Real Estate Market

A lot of people have attributed the sluggishness of the New York City luxury real estate market to the principles of supply and demand, with abundant supply outpacing increasingly limited demand. But there may be other factors contributing to the recent slowdown in the luxury sector of the market. These additional factors include over-hyped prices by developers, unrealistic expectations by investors and smaller Wall Street bonuses.

The luxury real estate market in Manhattan experienced seven consecutive months of decline in price after a peak in the middle of 2015. As a result of slowing sales, the median time of properties on the market was extended to about 131 days. There is still the belief by most people that the slow pace of real estate market is due to excess supply, which does indeed seem to be the case. But contributing to this excess supply are the over-inflated prices at which properties are being listed. These lofty prices are drawing more supply into the market, as owners will be more tempted to try and sell due to the lure of huge potential profits. This aspirational pricing model is creating excess supply for which there is insufficient corresponding demand.

Developers and investors have benefitted from rising prices in recent years to derive huge profits. But lately they have been struggling to sustain this level of success. At the same time, demand has been affected by a variety of factors including unfavorable economic conditions abroad. For properties and other assets to be sold off in a reasonable amount of time, the pricing needs to be set according to demand. An increase in the supply of luxury housing combined with reduced demand has resulted in the slowing of Manhattan real estate sales. More realistic pricing is the surest way to revive sales in the luxury segment of the market.

Another factor that some claim is contributing to the real estate sluggishness is the reduction in the average bonuses given to Wall Street bankers. There was about a 9 percent reduction in these bonuses in 2015. The smaller bonuses are due to the decline in profits on Wall Street last year, the lowest since 2012. While this decline is accepted as a factor affecting the drop in luxury real estate sales in the city, New York City real estate is still one of the safest havens for investors. It is entirely likely that as prices in the luxury segment come down to more realistic levels, demand for these properties will revive.

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New York Is The World’s 7th Most Expensive City

According to a recent report by the EIU (Economist Intelligence Unit), Singapore has been rated the most expensive city in the world. Singapore has been in the top most position for three consecutive years according to the report. It was followed by Zurich at second and Hong Kong at third. But in this latest annual ranking, New York City and Los Angeles have now entered the top 10 most expensive cities in the world. The higher ranking this year for both cities is largely due the increasing strength of the U.S. dollar. And it is entirely likely for both New York and Los Angeles to retain their spots in the top 10 in future rankings if the dollar continues to maintain its strength against other currencies.

Over 400 prices from 160 products and services were compared to determine the cost of living of each city. Everything from the price of gasoline at the pump to the cost of a loaf of bread was studied. The survey shows that for New Yorkers, the major factor increasing the relative cost of living is the power gained by the dollar recently, the effect of which is a rise in the prices of goods, services and other essential commodities compared to neighboring countries.

From New York’s position at 22^nd on the list in the previous year, it has risen to 7^th this year, and is about 20 percent more expensive than the average major American city. Other American cities appearing on this year’s list include Los Angeles next after New York at 8^th, Chicago at 21^st, Washington D.C. at 26^th, Houston at 31^st and San Francisco at 34^th. It is not surprising that New York took the higher position in comparison to these other American cities because it has always been the first choice of tourists, businesses, investors and other visitors.

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