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New York City Housing Trails National Rebound: Cutting Research

January 31, 2013

New York City Housing Trails National Rebound

Housing in the region that includes New York City is 4 percent overvalued relative to rents and 2 percent overvalued relative to incomes. Photographer: Andrew Harrer/Bloomberg

New York City’s housing market is poised to lag behind other markets for the next two years even as a national recovery in real estate continues.

That’s the assessment of Capital Economics Ltd. Property Economist Paul Diggle and assistant Michael Pearce, who in a Jan. 28 report said “conditions look less amenable to rising prices in New York City, particularly in Manhattan and Brooklyn.” By contrast, average U.S. prices may gain 5 percent a year, they said.

Housing in the region that includes New York City is 4 percent overvalued relative to rents and 2 percent overvalued relative to incomes, they estimate. Nationally, housing is 6 percent and 21 percent undervalued respectively, they estimate.

The economists compared average home prices in the New York region and nationally with average incomes over the past two decades to determine whether prices now seemed too high or low.

“Data on the level of house prices in Manhattan suggests that the average resident has to fork out seven times their annual income to buy in the borough,” they wrote. “The equivalent national figure is probably less than six.”

A potential crackdown in regulation of the financial services industry poses a threat to Wall Street, which may hurt housing prices for area residents, the authors said. Capital Economics’ U.S. housing department was the top forecaster of U.S. housing prices in the two years ended Feb. 1, 2012, according to Bloomberg Rankings.

“Regulatory uncertainty, not to mention macroeconomic instability emanating from problems in the euro-zone -- which we don’t think are over -- will constrain profits in the financial services industry and limit wage growth in NYC,” they wrote. “Domestic buyers will also not be helped by tight lending conditions” for larger-than-standard mortgages.

Finally, New York state continues to suffer from one of the largest backlogs of foreclosures in the U.S. About 6.5 percent of mortgaged properties in New York state were in the foreclosure process during the third quarter of last year, the fourth-highest of any state and well above the national rate of 5 percent, according to Capital Economics. The report said a foreclosure in the state typically takes three years to complete, the longest in the country.

“Over the next couple of years, we would not be surprised to see a period of more or less stable pricing” in Manhattan and Brooklyn, “with some gains in Queens, Staten Island and The Bronx,” they said.

“In time, the city’s ability to generate strong wage growth will see house prices and transactions perform more strongly. But in the meantime, expect a relatively sluggish couple of years in NYC’s residential market,” they said.

* * *

Cyprus, Portugal, Spain and Greece face the biggest risk of fiscal stress in the European Union, according to a Credit Suisse Group AG analysis of a new European Commission gauge.

The indicator from the Brussels-based commission features financial and competitiveness variables as well as budget ones. The other measures can sometimes foresee potential budget crises in such countries as Ireland and Spain, whose debt woes were masked by soaring domestic revenue that turned out to be unsustainable.

France and Germany appear to face almost no threat of fiscal stress, Credit Suisse economists Giovanni Zanni and Yiagos Alexopoulos said in the Jan. 25 report. Components of the index include data for economic growth rates, bond yield curves and the leverage of banks.

There is some good news for the region: In 2009, almost two-thirds of the EU countries were above the key fiscal stress threshold, indicating elevated risk of a crisis in 2010. Now only Cyprus, Portugal, Spain and Greece are above that warning level.

* * *

European proponents of a tax on financial transactions may want to look at Sweden’s experience of the 1980s.

The country imposed a so-called Tobin tax between 1984 and 1991, initially as a levy on the buying and selling of equities and then on bonds as well. The result: such trading shifted abroad, Andreas Johnson, an economist at SEB AB, said in a Dec. 19 report.

Bond trading fell by more than 80 percent and the options trading market disappeared, Johnson said. Revenue was 80 million krona rather than the 1.5 billion krona anticipated.

“Similarly, current European Commission revenue projections are likely to be too optimistic,” SEB said, citing a forecast of 57 billion euros in receipts if the tax was applied across the entire 27-member EU.

* * *

Wall Street economists’ focus on China’s slowdown ignores the Asian market most important to U.S. companies: Japan. And that market is now putting corporate earnings at risk.

That’s according to Joseph Quinlan, the New York-based chief market strategist for U.S. Trust, Bank of America Private Wealth Management. He said in a Jan. 28 report that the Bank of Japan’s moves to weaken the yen against the U.S. dollar could reduce American company profits over the next few quarters.

U.S. corporations’ foreign affiliates have earned a cumulative $108 billion in Japan since 2000, compared with China’s $63 billion, estimated Quinlan, who also lectures on finance and global economics at New York University.

“A weak yen relative to the U.S. dollar, combined with soft internal demand in Japan, represents a toxic brew for U.S. multinationals,” Quinlan wrote. “U.S. multinationals with significant exposure to Japan (think financials, technology, and consumer discretionary) could be set up for a nasty currency hit to earnings in the next few quarters.”

“At a minimum, some downside earnings surprises might be in the offing for some U.S. firms due to the swooning yen relative to the dollar,” he said. For U.S.-based companies, a strong U.S. dollar erodes the value of sales made in local currencies.

The Japanese yen has been the weakest among major currencies versus the dollar this year. Japan’s currency dropped for 11 straight weeks versus the dollar, the longest losing streak shown in data compiled by Bloomberg going back to 1971.

* * *

Germany has bypassed the U.K. as the preferred European destination for American migrant workers.

As British Prime Minister David Cameron proposes a 2017 referendum on membership of the EU, a study by St. Louis-based UniGroup Worldwide UTS found the U.K. had lost its pole position as a destination for American workers. It now ranks second, just ahead of Australia.

The reasons may include increasingly restrictive rules for international students and skilled workers, sluggish growth prospects and ambiguity about the country’s role in the EU, Eiko R. Thielemann, director of migration studies at London School of Economics, said in the Jan. 29 report.

Germany’s role as the European powerhouse through the region’s recent crisis has added to its appeal, the report said.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Craig Stirling at cstirling1@bloomberg.net


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