GUEST POST: What NYC's rent multiplier tells us about housing prices

Posted by anamaria

Wed Jun 9th, 2010 08:17 AM

GUEST POST: Published by Yaron Sadan of TheHardTrade.com

=====================================================================

As a resident of New York City, this topic is near and dear to my heart, and I am obviously a biased observer; however, today we’ll just focus on the numbers.

Bloomberg recently had an article about New York real estate prices and new condo development. Within the article, was this:

The relationship between home prices and rents typically remains steady within a market, Miller said. In Manhattan, the average apartment, adjusted for inflation, cost 8.1 times annual rent from 1991 to 1997, according to Miller Samuel data. That means that in those years, buyers in Manhattan concluded that the long term benefits of owning an apartment — tax savings and property appreciation — were worth an initial investment of eight times the cost of renting.

Then in 1998, Manhattan prices began a decade-long climb, with year-over-year values rising by 10 percent or more in most quarters. By the second quarter of 2008 apartment prices peaked at 22.4 times annual rent, according to Miller Samuel data.

For the full article, click here.

I went to look at some apartment listing around the different neighborhoods. Here are some of my assumptions:

Assume you bought a 2 bedroom for roughly $900,000 (we’re talking about $750 sq ft) – a good deal, not the top building and a discount for the fact that many buildings in New York are co-ops that face a discount for a host of reasons (annoying boards, lack of liquidity, rental limitations, etc.). The rent on the apartment would be roughly $4,500/month at current rates.

At a rent multiplier of 15 (average of 8 and 22), we’re looking at a “fair value” of roughly $810,000 – a 10% drop in real estate prices. But rents have been falling – the article suggests by 6% from last years levels. Let’s assume a conservative 6% drop going forward to $4,230. If that’s the case, we’re facing a 15% decline in real estate prices.

Those are some serious assumptions – so let’s take a closer look.

1. Rents might stay stable, but with financial services continuing to be a big loser in the most recent unemployment figures (over the last 5 months, financial services lost 58,000 jobs) and those being the drivers of high rents in the city, it’s tough to see rents staying stable. A 6% decrease is just based on the rent decrease last year, however, rents could certainly drop by more. With a lot of the new developments mentioned in the article as shadow inventory for either sale or rent, one or the other will be pressured, probably both.

2. Rent multiplier: I used the average of the high to low mentioned in the article. It’s probably a fine long term assumption, but the trend has been for the multiplier to come down and it could certainly overshoot to the downside. At stable rents (not likely) and a multiplier of 10, we’re looking at a 40% decrease in prices.

3. Range of prices: I used a conservative $750 per square ft. assumption. Many listings are at $1,000 per square ft. or higher, and while the rents in those buildings might be higher, there were plenty available at lower ranges. That would translate into very different rates of change for the higher level and new construction apartments.

4. Condo vs. Co-op: New York is a quirky market. Co-ops are more restrictive, and most apartments are owner-occupied. Additionally, co-op boards have much stricter entry requirements for down payments than banks, so their conservatism means that their owners will face less pressure to sell. In turn this may actually result in MORE selling pressure in the condo market as investors and real estate owners who own both will have more liquidity in the condo market than co-op.

5. External buyers have always been attracted to New York. Pied-a-terre’s for retirees or international owners are relatively more common than most other cities. In 2004 to 2008, it was common to hear about European buyers coming in as strong bidders. Except, at the time, the euro was strong and getting stronger. These days, real estate in the US looks a lot more expensive and many investors don’t want to lock up their money. Not that there won’t be foreign buyers looking to lower their exposure to their home currencies, just that it will be more of a hurdle.


All of that leads me to be quite concerned about New York City real estate prices.

Add a comment

45 comments

CAPTCHA Image