According to the Sun, the real estate industry is gearing up to have another go at 421-a tax abatements when the topic comes before the City Council in December. Their argument is that the changes in the law (which don’t take effect until July 1) combined with the declining real estate market, will slow development.
I don’t know that the changes to 421-a will actually result in any increase in affordable housing (the stated goal of the changes), but I think the industry is crying wolf here. First off, the changes will have been in effect for less than 6 months come December. Since every developer with a shovel in the ground today is rushing to get vested before June 30 (and thus still operate under the old 421-a rules), there is no doubt in my mind that there will be a slacking off of new construction after June 30 as the industry collects its breath. Add to that a market that is already moving away from condo development, and a market that by all accounts is softening, and you have the makings for a general lull in the second half of 2009. Given all that, I really don’t see how you can argue with a straight face that the new rules are slowing development.
But there is also a question as to whether or not the abatement itself is a zero-sum game. Yes, if the abatement disappears, property values on new condominiums will drop to compensate for the lost abatement. But total monthly housing costs will not change – prices will just adjust accordingly. For example, if I take out a $500,000 mortgage at 7% for 30 years, my monthly payments come to $3,325. For the sake of round numbers, assume that my monthly common charges are $675, and that, with the 421-a abatement, that includes $100 per month in taxes. So my total monthly payment for housing is $4,000. Now take away the abatement and raise my monthly taxes to (say) $600. If my mortgage remains the same, my monthly costs have increased by $500. But, if I am in the market for a new condo, and my total housing budget is $4,000, I am going to look for cheaper housing to compensate for the higher taxes. So instead of affording $3,325 per month in mortgage payments, I can now afford only $2,725 – which works out to a mortgage of about $410,000. So, as a result of the loss of the abatement, my purchasing power has dropped by $90,000 (18%!). That’s horrible!
Or is it? The loss of the abatement effects everyone, so if economic theory holds true, supply will reduce its asking price to meet the new demand. But only on new developments. If I already own a condo with the 421-a abatement in place, that abatement continues. So the price of my condo does not fall. If I am buying vacant land to develop a condo, my offer price will presumably reflect the new 421-a reality. Yes, some people lose out – mainly developers who bought property based on developing condos with the abatement. But risk is part and parcel of real estate development – developers make incredible profits because they take pretty big risks. And anyone purchasing property for condo development in NYC in the past one to three years should have understood the risk of not having the abatement to market.
In the grand scheme of New York City real estate, the number of developers caught in the middle on this has to be pretty small. And therefore, the real effect of this legislation on property values should also be negligible. Yes, selling prices on new condo developments will drop to reflect the increased taxes. But the net effect to the buyer will be zilch – you will still be paying the same amount per month as you would have under the old 421-a rules.
Circling back to the Sun article, the effects of these changes on property values won’t be felt until mid-2009 at the earliest (after all, we are talking about projects that don’t have foundations poured by June 30, 2008). But that won’t stop the industry from crying wolf come December.