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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