A Potential Property Crunch Could Hit Here


Dearie me. Yesterday I got my head so far up in the clouds overviewing global real estate that I forgot the main point I was originally driving towards.

There’s a potential property crunch in play that I want to bring your attention to.

Here’s a warning: I may be off base. But there’s enough meat to the idea that I think it’s worth thinking about.

It ties in with some of the other trends we’ve been tracking.

Don’t forget it’s the obscure ideas that come from the fringe that usually upset markets. The ones we read about daily get priced in mighty quick.

It may all depend on what New York State legislators decide to do…

Currently New York State has a problem. It’s running a sharp budget deficit and the outlook is deteriorating[1].

That’s not their only problem.

The Transit Authority that runs the subway says it needs US$40 billion in funding over the next decade[2].

If you’ve been to New York, you’ll know how ancient this train system looks.

Nobody is sure where this money can come from.

Naturally the state government is trying to find ways to raise fresh funding.

One of those ideas hit the headlines this month.

New York Governor Andrew Cuomo is proposing to raise the property tax on apartments in the city valued above $US5 million if it is not the owner’s prime residence[3].

This change hasn’t gone through yet. But it could have big implications.

Now, we need to put this into some wider context.

Currently, New York State property taxes are derived from the implied rental income of the property, and not the total sales value.

This vastly reduces the tax bill on prime Manhattan properties[4]. Any change here would send ownership costs much higher.

That’s not all…

US President Donald Trump’s 2017 Tax Act now limits the federal deductions US taxpayers can claim against their state taxes to US$10,000.

It also put a limit on deductions for mortgages above $US750,000[5].

This is driving a shift in interstate migration away from high tax states like New York to places like Florida, Nevada and Texas.

The New York real estate market is already weak. Last year prices for super prime homes were down 10–30% from their peak in 2014[6].

That brings us to the big kicker for today’s piece…

Another ‘tall’ could open half empty

Back in January I reported on a New York developer called Gary Barnett.

He’s currently finishing what will be the tallest residential building in the world. It’s called Central Park Tower[7]. It will be 472 metres high on completion.

18 of the 179 units available are priced above US$60 million.

Mr Barnett has a hefty US$900 million loan from JP Morgan Chase.

He needs to sell US$500 million in apartments by December 2020 and pay off US$300 million to the bank by the following year — otherwise the bank can hike his interest rate.

I’d be a little worried if I was him. Nine residential towers above 200 metres have gone up since 2015. 22 more are set to join them by 2022.

That’s a lot of competition.

Why do we care about any of this? A major bust in New York real estate could transmit repercussions in many different places.

Who knows exactly?

Maybe it causes panic selling in the stock market or fire sales elsewhere to cover losses or meet debt covenants.

Perhaps the US banks exposed here get into trouble.

Or possibly it shakes foreign investor confidence.

Perhaps the Fed is watching this and decides to keep rates a little lower for longer to prop up the ailing property market — and creates a bubble elsewhere.

I can’t tell you exactly.

All I know is that very tall buildings have a habit of opening in recession.

Central Park Tower could join a long list of iconic buildings that reach to new heights — and open half empty. As I said before, be bullish 2019, but be a little worried about 2020.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch