A Tale of Two Cities
Buyer or seller? Depending on which camp you find yourself in, at times it can certainly feel like two distinct cities. We’re hearing a lot from our clients this month on both sides of real estate transactions.
The first sentiment we heard from buyers is that they remain very mindful of the Fed drumbeat when it comes to higher interest rates. In the middle of the month, Fed Chair, Janet Yellen testified that delaying rate increases “. . . could leave the Fed’s policymaking committee behind the curve and eventually lead it to hike rates quickly . . .” Sellers see the same interest rate trend. Rising interest rates reduce buyer purchasing power with every 50 basis point rise increasing annual debt service by $4,000 on a $1M loan. Clearly the interest rate change affects the $1 million dollar buyer more than the $3 million dollar buyer.
The second sentiment is the pending inflation on real property as interest rates move higher. Our buyers want to lock in attractive prices while our sellers look at rising interest rates as a double-edged sword: higher interest rates reduce purchasing power while inflation moves the prices of real assets higher.
The final sentiment is driven by the new developments that will come on-line in
Manhattan and Brooklyn in 2017. Currently there are approximately 5,500 properties on the market in Manhattan which is basically the average over the past three years. The forecast for new property launches in Manhattan for 2017 is 4,789 units and for Brooklyn it’s 2,400 units. The forecast for the UES is 196 new units coming on-line while the area south of 14th Street is going to see 2,700 units. Buyers and sellers will see pricing affected by supply and demand in most areas of Manhattan and we would advise our clients to closely monitor trends through this newsletter as we follow the market in 2017.
MANSION TAX UPDATE
The current mansion was put into place in 1989. At that point the parameters for the mansion tax were more closely aligned with most people’s definition of a mansion. In 1989, the buyer was charged 1% of the sale price for any home that sold for more than $1 million.
For example: If the apartment’s selling price was $1.25 million, the tax would be $12,500. At the time the law was put in place, $1 million was a pretty good inflection point for mansion consideration.
Mayor DeBlasio wanted to revise the mansion tax in 2015. His proposal, at that time, was a bump in the threshold from $1 million to $1.75 million. In conjunction with the threshold change, he also proposed moving the tax rate from 1% to 1.5% on real estate sales over $5 million. This was a net tax winner resulting in a $200 to $300 million windfall for New York City and also an opportunity for him to win votes with his constituency. Unfortunately for Mayor DeBlasio, this proposal failed.
In 2017, Mayor DeBlasio is running a similar mansion tax proposal up the Albany flagpole. He has revised his plan. Properties selling over $1 million would continue to be charged a tax of 1% while 2.5% would be charged on the margin for properties over $2 million.
For example: If the apartment’s selling price was $3 million, the original tax would be $30,000. The proposed tax would be an additional $25,000 ($3 million – $2 million = $1 million times 2.5%) or a total of $55,000.
Mayor DeBlasio’s new mansion tax proposal would need approval from the state senate, assembly and governor’s office. With the current makeup of the senate this proposal will probably never see the light of day.
Although there are many social inequalities that need to be addressed in the city, placing significant tax burdens on one of the main financial drivers for the city should be debated and reasoned with plenty of collective thought. The law of unintended consequences always looms large in a city like New York, and significant decisions around economic drivers should be properly vetted by the experts.