speri.comment: the political economy blog

Blowing bubbles

A booming property market is transforming life in New York City and reviving a price bubble that threatens future stability

Timothy J. Sinclair, Visiting Fellow at SPERI and Associate Professor of International Political Economy at the University of Warwick

Timothy Sinclair

Timothy Sinclair

I have been coming to New York City regularly since 1990. The city has changed a lot in that time. For most of these years my major task has been research on Wall Street. I’ve met a lot of interesting people and heard a lot of strange and wonderful things. But it’s hard, especially in a place like this, to ignore the physical surroundings of the city. I have come to love the place as so many do.

As a non-American, what strikes me are the incredible changes in direction you see here so much more quickly than anywhere else in the developed world. Whole neighbourhoods that for many years seemed to lie dormant suddenly become phenomenally plush in the space of just a few years.

My most recent trip to New York was in December when I came to do interviews for my second book on the credit rating agencies. I took the subway from JFK all the way into Manhattan. This is the slower way to come of course, but it does show what’s going on in the outer boroughs and it certainly provides a panoramic view of the city as you approach it from the east. I stayed in Greenwich Village as I usually do in a hotel on West 11th Street.

I have started to really get a feel for this neighbourhood, having been coming here for 20 years. I finally went to Gene’s, the old Italian restaurant (est. 1919) a few yards from the hotel. I had just turned fifty, but I felt like a young boy because most of the people dining that evening were in their 70s or older. I needed somewhere I recognised to recover because the walk from the subway station a few blocks north of West 11th to the hotel had really been startling. A whole series of enormous apartment buildings are going up in the neighbourhood, typically retaining just the façade of the old brownstones. These are premium developments. I’m not sure any surviving beat poets would feel at home in the Village in 2014.

It seems that the old real estate expansion machine is moving again. Real estate bubbles are nothing new to the United States. There have been several in the last few decades, the most notable associated with the savings and loan crisis in the 1980s and 1990s when local savings banks were given new financial freedoms. Many people also don’t know that much of the instability that helped trigger the stock market crash of 1929 was associated with speculation in Florida real estate. Reversals in this market helped to prime the market for collapse.

Last month The New York Times reported that housing starts were up 23 per cent in November. The cost of renting in the US has risen about 3 per cent a year since 1983. This is what you would expect if the cost of accommodation grows with inflation and of course you’d expect home prices to do much the same. But that is not so. Prior to 2007 and the property market collapse, the growth rate for house prices was about 6 per cent a year in NYC. Since then in many parts of the US and in scores of other countries real estate has fallen in price quite dramatically, but it now seems that annual price increases are returning to bubble rates well above rental increases. Between 2011 and the third-quarter of 2013 The New York Times reported that prices rose by 5.83 per cent, while rental costs in the same period increased by just 2 per cent. Despite all the talk of larger deposits in the US, at least half of all mortgages in October 2013 only required a 5 per cent, or lower, down-payment.

You have to ask yourself: what does it mean when small apartments in New York City cost US$800,000? When neighbourhoods like Bedford-Stuyvesant, which were notorious for drugs and gangs until recently, are now desirable, when expatriates purchase properties for cash and leave them empty for months at a time? What does all of this mean for the city and what does is it mean for the people who actually work there?

It must mean much longer commutes; and it must mean spending a lot more money on transportation. It is as if the whole city is becoming Canary Wharf. I like New York. It’s a great place to go. The energy is astonishing. The people are open. They’re rude, but that’s okay. But it’s hard to not feel that you are increasingly a spectator on another species, almost literally a different type of human being. The inequalities are simply astounding. New York, like London and other cities of its kind, is a place of astonishing innovation and delight. But, unless I am missing something, everything seems to be heading back in a familiar direction. As if we have learned nothing.

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