How Speculation is Affecting the Manhattan Apartment Market

by 16 Dec 2012

Real estate in the United States usually boils down to two dialectics. One is the adage about the value of purchasing versus renting a home, and the other is finding the right time to buy. Before the 21st century, most Americans believed that buying a home had greater economic benefits than renting, regardless of the buyer's financial situation. A similar belief was that buyers should not wait to buy a home since residential properties always appreciate. 

When the real estate windfall of the early 21st century came to an end, many Americans realized that the adages about homeownership can prove incorrect during hard times. When the housing market in the U.S. dried up, millions of homeowners got stuck with expensive mortgages and depreciating properties that cost too much to maintain. Most regional housing markets went on the decline, thereby making them unattractive to invest in. 

Not all housing markets, however, exhibited the same behavior. The Manhattan apartment market, one of the most lucrative in the nation, presents a unique paradox in the sense that both rents and prices have increased considerably over the last few decades, and yet a home purchase in the heart of New York City comes at a high premium to own that is simply not justified by the price-rent ratio. 

Real Estate Dynamics in Manhattan

According to a recent study published by the Federal Reserve Bank of New York, apartment prices in Manhattan did not suffer the huge price drops seen in other markets like Los Angeles and Miami. Rents have risen considerably, following an even pattern of supply and demand. Such is not the case with apartment prices, however, as they are not commensurate with monthly rents. 

The true value of apartments in Manhattan is woefully diluted by speculation. The rise of monthly rent payments in New York, except for those subject to rent control, is supported by fundamentals such as housing supply, demand from renters and affordability in terms of the renters' wealth and income. 

The Manhattan price-rent ratio used as a metric by the New York Fed is the result of taking the property market price and dividing it by the price of the annual residential lease contract. In this calculation, the costs of apartment ownership such as property taxes, mortgage principal and interest, municipal fees, and maintenance must be taken into account. A high price-rent ratio is indicative of overvalued properties, which is noticeably the case in the Manhattan apartment market. 

Sustaining Apartment Prices and the Housing Recovery

The high price-rent ratios of the Manhattan apartment market is of particular concern due to the ongoing recovery of the U.S. housing market. Lower mortgage rates and property taxes in New York City have some responsibility in the high price-rent ratio phenomenon, but real estate speculation has played a stronger role.

The appreciation of Manhattan real estate over the last two decades has been largely speculative and artificial, at least according to the price-rent ratio research conducted by the New York Fed. This should not have a significant effect on the burgeoning U.S. housing recovery, however, since data in 2012 suggests that apartment prices are stabilizing while rents are gradually increasing.

COMMENTS

  • by Rick | 12/17/2012 5:59:27 PM

    The only thing speculative here is the reporter's comments. I rent out apartments in the Manhattan market - the blogger appears to have not done any research whatsoever (and doesn't even provide the Fed statistics supposedly supporting his argument). He also ignores the impact of co-operative boards and the restricted nature of this form of housing, as well as the impact of foreign buyers and corporate buyers who may also have homes elsewhere. Manhattan has a unique housing stock mix, with co-ops, condos, brownstones, restrictive rental opportunities between rent-control, rent stabilization, income-restricted co-ops and other subsidized housing, with a wide range of buyer motivations. Also, apartment prices trend differently depending on neighborhood, housing stock ( type and quality) and unit size. To say that the market is speculative, artificial (what does that mean??) and overvalued now and for the past twenty years, is unsupported speculation. It betrays the writer's lack of detailed knowledge about this nuanced and dynamic market. The writer displays a sophmoric grasp of market fundamentals, perhaps betrayed by his comment that this is a "lucrative" market. On what planet can he make that claim? Lucrative for whom? The seller - not necessarily. Like any other, this market has its ups and downs and whether you gain or lose depends on when you bought and when you sold. In addition becuase of the high mix of co-operatives, unit turnover can actually be quite low. Immutable law of markets, any market. This article would never have made it into a publication I would edit. It is not good journalism.

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