After nearly a decade of expansion, New York’s luxury co-op and condominium market has taken an undeniable downturn—and it’s not a gentle slope either. According to several prominent industry players, prices at the high end of the market have experienced a drop of approximately 25% from their peak in 2015. Of course, this begs the question: what’s behind this double-digit decline? Overbuilding? Tax policy? Economic confidence? Other factors? Perhaps it’s a combination of all those and more.
The Perfect Storm
Jonathan Miller is the president and CEO of Miller Samuel, a real estate appraisal and consulting firm located in Manhattan. His firm compiles quarterly and annual reports on market conditions in cities around the country. “Since 2014-15,” he says, “in the luxury market north of $10 million, you’re talking a 25% drop for new development units. The overall range is 15% to 40%, depending on how aggressive the pricing was at the peak of the market. Pricing on existing product, or resales, is also down approximately 25%.”
“This decline is a result of several factors coming together at one time,” Miller continues. “They include the changes to state and local tax (SALT) deductions and mortgage interest deductions in the 2017 tax law, the increase in the New York State mansion tax, and the unintended consequences of the new rent law and guidelines passed into law by the New York State legislature this past year. The new rent law has crushed investors who bought a lot of these units.”
The 2017 Tax Act
At the time of its passage, 2017’s Tax Cuts and Jobs Act inspired a great deal of discussion over what effects its changes to the provisions for deducting SALT and qualified mortgage interest charges would have on NYC’s co-op and condo market. New York is a particularly high-tax state and locality that benefited from the prior tax regulations. The general consensus seemed to be that these deductions were less of a consideration for the luxury end of the market, since buyers at that level were less concerned about and dependent on the tax benefits of ownership than middle-class buyers. According to a fair number of market pundits, the very wealthy had different needs and considerations in making their purchasing decisions; it now appears that those market-watchers were dead wrong.
Market experts surveyed by The Cooperator indicate that contrary to those earlier opinions, the savings from SALT deductions on their units were in fact important to luxury purchasers. With SALT deductions now capped at $10,000 per unit, tax savings are capped as well. Consider a tax bill of $1,500 per month, equal to $18,000 per year; at the low end of the spectrum for a luxury condominium in Manhattan, the owner loses $8,000 per year in deductible expenses, equating to at least $3,600 per year. And keep in mind, this calculation doesn’t take into account whatever state and local income tax deductions the owner has lost as well as a result of this change. The resulting tax savings has fallen in most cases by tens of thousands of dollars.