Analysts: GOP tax plan could reduce Manhattan home prices by nearly 10 percent

By Nathan Tempey  | December 5, 2017 - 3:00PM

The Republican tax bill, if enacted, could cause Manhattan home prices to drop by close to 10 percent, and make New Jersey and Westchester County prices decrease even further. That's according to Moody's Analytics researchers who spoke to the New York Times for its overview of the possible repercussions of the tax reforms on local real estate.

Perhaps the most significant for New Yorkers is the Republicans' proposed capping of the property tax deduction at $10,000 and the elimination of state and local tax deductions. State and local taxes have been deductible since the federal income tax was introduced in 1913, according to the Tax Policy Center. Because of New York's high taxes, New Yorkers, like residents of other coastal, Democrat-governed states, stand to be hit hardest by the elimination of the SALT deduction and the decrease in the property tax deduction, essentially by getting taxed twice.

The effects will be concentrated among homeowners, especially homeowners in higher-tax counties, and households making over $200,000. Lower-income earners will benefit in the short term (individual benefits are set to phase out, unlike corporate tax cuts) from a higher standard deduction, which likely will outweigh the loss of their state and local tax deduction, whereas owners of valuable property and people with big salaries typically write off much more—the average SALT deduction for high-income Manhattanites is $148,000 according to the Times, and the average Manhattan property tax deduction is $22,000, well above the $12,000 standard deduction for a single person.

The projection that this will sink sale prices in the area makes sense, according to appraiser Jonathan Miller of the firm Miller Samuel, because the tax increase means less money free to cover other housing costs.

"If someone can’t write off $50,000 in real estate taxes, that affects how much they can afford a monthly payment," he says. "Therefore, reverse engineer it: It does pull down property values."

On the federal level, congressional number crunchers predict that the tax plan will create a budget shortfall of over $1 trillion in short order. Republican lawmakers have disputed these figures, but provided no evidence for their rosier assertions. In the tri-state area, Miller says the slump in prices could have a spiraling effect, leading to even higher local taxes.

"There’s a threat of higher taxes as a result because municipalities will try to make up the shortfalls," brought on by lowered property tax revenue, he says. "In a nutshell the bill is very anti-homeownership and much more positive on being a landlord."

Landlords stand to make out all right, he explains, because they still get to write off their business expenses. They would also pay over a third less in corporate taxes under the GOP legislation.

"The default is homeownership is not being favored in this like it has since the beginning of time, and it’s a little bizarre," Miller says.There is still a great deal of uncertainty about what will make it into the final bill being negotiated now, as the House and Senate bills, though they both hand corporations tax cuts and are projected to deepen the deficit, differ on some key points. One question is whether the final bill will eliminate the mortgage interest deduction, a major part of the country's long-running subsidization of homeowners, and one that the Times Magazine wrote costs the government $71 billion a year.

Anti-poverty activists have argued that the mortgage interest deduction entrenches longstanding racial and class stratification, by rewarding those who can afford a down payment on a house while those struggling to make their rent get no such tax break. The mortgage interest change proposed in the House bill would not divert billions to ending homelessness, as activists would like, but would instead go to help partially cover the tax revenue lost by cutting taxes for the ultra-wealthy. 

In Manhattan, home prices are predicted to drop 9.5 percent by summer 2019. Nationally, Moody's projects that home prices will fall 5 percent. The authors of the firm's report explain that they are factoring in possible changes to the mortgage interest deduction, decreases in property tax deductions, and higher mortgage rates that they predict will come from greater deficits and national debt weakening housing demand.

Stocks, on the other hand, are expected to rise as corporations get to keep more of their profits.

John Banks, president of the Real Estate Board of New York, a real estate industry trade group, says in a statement that some aspects of the tax plan "will promote economic growth and job creation," but that other aspects, including the elimination of the SALT deduction, have his group "deeply concerned."

The tax plan could also disrupt several government initiatives for encouraging the construction of below-market-rate housing. For example, repealing the tax exemption for the kind of bonds used to finance affordable housing developers, as the House bill proposes, would lead to over three quarters of a million fewer below-market apartments being built in the next 10 years, according to an accountants' analysis cited by CityLab.

The Times frets that increased tax burdens on ultra-wealthy New Yorkers could drive them out of the area to lower-tax states. Fewer than 40,000 people pay about half of the city's income tax. The paper does not look here at the benefits of the other aspects of the tax plan to the area's rich, not to mention the availability of offshore banking, when contemplating these people's willingness to flee the city.



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