After New York City developers ignored affordable housing for years in favor of the fatter profit margins on luxury development (spurred on by what looked to be an extremely durable post-crisis recovery), the chickens are finally coming home to roost, as the Financial Times explains, what appeared to be an uncomfortable pullback in sales prices for luxury homes – spurred by a retraction in bids at a time of expanding supply – is now poised to metastasize into a full-blown market rout with implications beyond New York City.


To wit, the number of unsold homes in Manhattan has plunged by 40% through September compared with the first nine months of 2017. This translated into a median sales-price decline of 9%. And while the slowdown has already spread from Manhattan’s luxury market throughout the rest of the island, some brokers believe NYC is the canary in the coalmine warning of a broader housing-market pullback after nearly a decade of untrammeled growth.

“We’re in the middle of a US housing slowdown, with Manhattan’s prime market the first and most sensitive to react,”says Jonathan Miller of Miller Samuel, a local property appraiser.

Still, the overabundance of unsold homes is most acute in the luxury market, where the ratio of sold to unsold homes has exploded over the past year, as the FT points out. And what’s worse, these figures don’t incorporate what brokers call “shadow inventory” – unsold homes that are being kept off the market by anxious brokers fearful of provoking a panic.

Here’s a helpful breakdown of sales data detailing the slowdown in the NYC housing market:

  • During the third quarter of this year the average Manhattan home took 137 days to sell. Some 42 per cent of homes priced above $10m were on the market for more than 180 days
  • Homes priced above $3m comprised 30 per cent of inventory and 15 per cent of sales in the third quarter of 2018
  • Currently, the sales tax (including state and city tax and state mansion tax) for a new $2.5m home in Manhattan is 2.8 per cent

The stock of unsold luxury homes has been piling up. For properties priced above $3 million, the ratio of homes sold to those currently for sale in Manhattan has gone from 1:3 to 1:6 in a year, according to Stribling. For homes priced above $10m, the ratio is 1:10. Though one broker at Stribling said the real figure could be closer to 1:15, given that developers are probably low-balling their figures, anxious about sending the market even lower.

This has led to a buildup in “shadow inventory” as one broker called it.

“They are holding back homes that they would otherwise be actively marketing, and which would therefore show up in inventory figures,” he says. Inventory figures are being “significantly manipulated” by the practice of excluding this so-called shadow inventory, according to Miller.

In the most rarefied stratum of the market – homes worth $10 million or more – prices have fallen by roughly 30% since the peak in 2014.

“In the market north of $10m, you’re seeing prices off anywhere from 10 to 30 per cent from the peak in 2014,” says Miller. In the third quarter of this year, the average home sold above $10m went for 13 per cent less than its asking price, the biggest discount of any price bracket tracked by Stribling. 

Prices are being squeezed as a chasm opens up between bids and asks. Total inventory is set to expand from 6,300 in 2017 to 7,900 in 2019, even as the number of apartments sold is expected to drop from 1,900 to 1,800.

Much to the chagrin of high-end developers, the poster children for the dearth of sales in the Manhattan housing market are the members of “Billionaires Row”. During New York City’s post-crisis property boom, many developers focused on luxury housing, which typically can be sold at a higher premium, yielding fatter profits, at the expense of affordable housing. The result has been a glut at the high end of the market, while the average renter is struggling with housing costs at or near all-time highs.


(Courtesy of the FT)

And with 22 more luxury towers set to hit the market between now and 2020 (including the Central Park Tower, which will become the second-tallest building in the US) prices are poised for an even larger drop.

In the past three years, nine new residential skyscrapers (many include commercial tenants, too) taller than 200m were built in Manhattan, according to the Council on Tall Buildings and Urban Habitat. Between the beginning of this year and the end of 2020, 22 more are set to join them, providing another 1,412 floors to a total height of 3.6 miles.

These will include Central Park Tower – which will become the US’s second tallest building, reaching up 472m, when it is completed in 2020 – and 111 West 57th Street, will reach to 435m when completed next year.

Beyond 2020, the crush of unsold inventory could create a vicious cycle as developers are forced to put more inventory on the market as their conviction that this drop in prices was merely a blip begins to fade.

“Many of these were held back in 2015 when the market started to turn when there was a belief that this was a blip. Now that these firms’ lenders can’t wait any longer, so many of the homes that are likely to come online through 2018 and 2019 will be the larger, high-value units.”

One factor driving the housing glut in NYC is the Republican tax reform law that went into effect earlier this year. Its cap on itemized deductions related to state and local taxes (including NYC’s not-inconsiderable property tax rate) has made it more economical to rent instead of buy. Ironically for NYC real-estate developers (a group that includes President Trump), this tax law couldn’t have come at a worse time. Property taxes on new developments are particularly high, with one broker estimating that buyers of a $3 million condo will pay $44,000 a year in property taxes to the city, not including other unrelated taxes.


And among the apartments for which brokers do manage to find a buyer, many of them are turning around and putting the unit up for rent within six months. According to Street Easy, a total of 1,313 recently sold apartments were listed for rental within six months, the highest number since the firm started collecting data twelve years ago. This increase in housing supply can effectively negate the sale’s impact on the broader market, since potential buyers may choose to rent instead.


Undeterred, developers are adopting a smorgasbord of tactics, from moving up commission payments to incentivize brokers, to offering to shoulder some of the tax burden incurred by buyers.

Nonetheless, developers are trying a range of tactics to avoid cutting prices. To incentivise brokers, they are shifting commission payments forward from the date on which a sale is closed to the date on which it is agreed, which may be two years earlier, says Derderian.

Buyers are being lured with offers to pay transfer taxes, covering mansion tax – an additional 1 per cent sales tax on homes costing more than $1m – free parking spots (which currently set you back $750,000 at the soon-to-be completed residential tower at 220 Central Park South), interior upgrades or cash back to spend on the apartment.

The advantage for developers of such perks is that they limit the price cuts, flattering the state of the market with the official price figures, Derderian says.

When it was launched, buyers of homes in Beekman Residences in Downtown were being offered a $10,000 gift card to spend at the hotel in the same building. If the market’s current trajectory continues, that may not cover the bar tab to drown their sorrows.

But these tactics can only work for so long. Eventually, sellers will need to reckon with what has become a fundamental imbalance in the NYC housing market. And the irony is, renters, who have fewer affordable options than ever before, won’t find much relief amid the dropoff in development that will almost certainly ensue.

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish.