In terms of the luxury New York City real estate market, one of the most important reports of the year was issued this week: The New York State Comptroller’s report on Wall Street bonuses. The numbers from the report may have sparked an uproar in the national media about their overall size, but, relative to last year, the size of bonuses is quite small.
In fact, the change from last year was one of the largest drops of all time: Add up all the numbers, and you come up with a 44% reduction from the 2007 figure. That reduced figure, however, still comes in at $18.9 billion. Even at that still-high level, though, it’s the largest drop in terms of total dollars ever and the largest percentage drop in over thirty years.
As most readers know, the financial services industry is the most important industry in determining demand levels for luxury Manhattan apartments.
The size of the drop off is relatively good news for those worried about corporate accountability. Perhaps ironically, though, from the perspective of New York state, the fall-off in bonuses means a huge reduction in tax receipts, and will surely be one of the largest sources of the looming state and city budget deficits. It is estimated that the fall-off will create a $1 billion hole in the state budget and an additional $275 million reduction in city tax receipts. (Before the financial crisis began, the financial industry made up roughly 20% of the state’s tax revenue and 12% of the city’s revenue).
Some other figures from the report:
- The size of the average bonus declined roughly 37% from last year.
- Employment in the securities industry has declined roughly ten percent over last year’s figures.
- Of the seven “major financial institutions” headquartered in New York City, one has failed, two have been taken over by larger financial institutions, and two have been transformed into banks.
What this means for the New York real estate market is obvious: The decline in bonuses has been a major source of the reduction in demand for New York City apartments and the city’s real estate market more generally.
There is an interesting coincidence in the timing of the report: Given the varying expectations concerning when a recovery in the market will begin, next year’s report will probably be a major sign of what is to come… If bonuses are back up, and a recovery has not occurred yet, we will be able to safely predict the top of the real estate market will start to pull up average prices once again.
If the numbers remain low – relative to recent years, as opposed to what common sense dictates horribly incompetent executives should receive – and a recovery has yet to gain much steam, then it will be possible that the market will continue to languish. All that is to say that investors and buyers should keep an eye out for the same report around this time next year.