What’s Manhattan Worth? A Land Values Index from 1950 to 2013.

by Jason Barr, Rutgers University (jmbarr@rutgers.edu), Fred Smith, Davidson College (frsmith@davidson.edu), and Sayali Kulkarni, Rutgers University (sayali283@gmail.com).

Abstract : Using vacant land sales, we construct a land value index for Manhattan from 1950 to 2013. We find three major cycles (1950 to 1977, 1977 to 1993, and 1993 to 2007), with land values reaching their nadir in 1977, two years after the city’s fiscal crises. Overall, we find the average annual real growth rate to be 5.1%. Since 1993, land prices have risen quite dramatically, and much faster than population or employment growth, at an average annual rate of 15.8%, suggesting that barriers to entry in real estate development are causing prices to rise faster than other measures of local well-being. Further, we estimate the entire amount of developable land on Manhattan to be worth approximately $825 billion. This would suggest an average annual return of 6.3% since the island was first inhabited by Dutch settlers in 1626.

URL: http://d.repec.org/n?u=RePEc:run:wpaper:2015-002&r=his [this link will download a Word copy of the paper to your computer]

“All cultures have their creation myths, and according to cherished New York legend, the Manhattan real estate market was born when the Dutch paid $24 in shells to the Indians for an island that is today worth billions of dollars. The persistence of this story tells us more about the justifying strategies of our own times than about the past. The Manhattan real estate market, the myth implies, is as natural as its bedrock and harbor, and real estate magnates who today pursue “the art of the deal” are only fulfilling their forefathers’ vision of the profits embedded in Manhattan land. The conditions of Manhattan’s land and housing markets, far from being part of the natural order of things, are rooted in a social history. It is, after all, people who organize, use, an allocate the benefits of natural and social resources, and the value they assign to land depends on the larger set of social relations that organize property rights and labor. […] How did land become “scarce”? […] Who profited, who lost, and what difference did the flow of rents make to New Yorkers’ understanding of their social responsibilities within a shared landscape […] The myth that celebrates a real estate deal as New York’s primal historical act lends an aura of inevitability to the real estate market’s power to shape the city landscape and determine the physical conditions of everyday life. New Yorkers today live in the shadows of deals that have produced the glitter of Trump Tower, the polished facades of renovated brownstones, and the shells of abandoned buildings. These shadows especially darken the paths of those who are getting a bad deal: the more than 50,000 people who have been displaced onto the city’s streets and sleep in doorways, subway stations, railroad terminals, or temporary shelters. Contemporary politicians invoke this landscape of light and shadows to point to the contradictions of of our time: a city that can indulge extravagant displays of wealth cannot afford to house its people.”

Debates over the high market value of real estate and the unaffordable price of housing occupy a constant place in the public spheres of the major cities of the world, especially in those where land is already a very scarce factor and vertical, intensive urban development takes place in the form of tall buildings, towers and skyscrapers. However, historical perspectives on the real estate and housing markets are for the most part lacking in these discussions. In their paper, Jason Barr, Fred Smith and Sayali Kulkarni attempt to fill the gap for New York City, a capital of capital like no other, to borrow from the title of the book by financial historian Youssef Cassis (Cassis 2007). In their work, published in NEP-HIS 2015-04-11, the authors develop a land value index between 1950 and 2013 in Manhattan, the island that defines the Big Apple like no other borough does.

According to the deflated value of their index, the real value of real estate in Manhattan since 1950 has increased at an (otherwise impressive) average annual growth rate of 5.1%. The authors identify three long cycles: the first one, 1950-1977, roughly coincided with the golden era of Western capitalism, a skyscrapers boom and the demise of urban industries; the second one, 1977-1993, began with the consequences of white flight to the suburbs and fiscal crises in the city and lasted until the financial Big Bang of the late 1980s and early 1990s; and the third one, 1993-2007, manifested the impact of financialization of the U. S. economy, the rise of Manhattan as a services powerhouse, and the emergence of New York as a truly global city, in the sense proposed by the sociologist Saskia Sassen (Sassen 2001).

The authors go through the methodological problems of developing a land value index. The first problem has to do with whether one assesses the value of undeveloped land or whether one incorporates the constructions on it. The second problem is that of using either market prices or assessment of values for taxation purposes, for example. A third problem derives from the divergence of market prices and assessed values, a divergence which is considerable in the case of New York City during this period.

Barr, Smith and Kulkarni collected prices on “bona fide, open market sales in Manhattan” of mostly vacant parcels in the island (Barr, Smith, Kulkarni 2015: 5). An underlying assumption in the authors’ exercise is that vacant parcels in the island are free to be developed without restrictions; nonetheless, they duly take into consideration the fact that both rent-stabilization and landmark district policies would drive the value of the vacant plots downwards. The authors then run regressions with different specifications to detect the influence of variables such as plot size, location within Manhattan, availability of subway stations, the overall quality of the neighborhood where the plot was sold, and the influence of gentrification. After several specifications, the authors are able to develop a land value index that is later deflated by the consumer price index in New York City and the deflator of the gross domestic product (the reason being that the price level in New York has risen more rapidly than in other areas of the United States).

To account for the three long cycles of their land value index, the authors weave a very interesting narrative layered by elements of urban, fiscal, political and social developments within the city with the larger macro trends in the United States and the world economies. After having revised the historical record, the authors assert that the current skyrocketing values for land and properties within Manhattan are due to “the combined effects of the city’s zoning rules, rent regulations and real estate tax policies [which] are discouraging the new construction needed to keep pace with economic growth.” (Barr, Smith, Kulkarni 2015: 11). The good intentions of policymakers on the city and the state levels have actually been most beneficial to “land owners, who can accrue monopoly rents from lack of entry in the real estate market.” (Barr, Smith, Kulkarni 2015: 15).

The land value index cointegrates with real estate building sales in New York (excluding co-ops and condominiums) and with local employment, not so much with the performance of the financial market as measured by the Standard and Poor’s stock price index. Finally, the authors attempt to estimate the value of Manhattan by assuming what would happen if all proprietors “sell their ownership claims to the land beneath the structure of the island. How much would one party be willing to pay to own those claims and collect ground rents?” (Barr, Smith, Kulkarni 2015: 12). The researchers calculate that Manhattan’s actual worth (a measure of wealth, that is, a stock variable) is between the range of $784 to $867 billion dollars. As a measure of comparison, the gross domestic product of New York State in 2013 (a measure of income, that is, a flow variable) was $1.2 trillion dollars.

By sheer luck for this writer, The Economist just published an article on the demand-side housing policies of the DiBlasio administration in New York City: the city spends over $870 million dollars on emergency beds to provide temporary housing for the more than 60,000 homeless people of New York. One wishes for the policymakers surrounding the major of the city to read such a well-crafted paper as the one reviewed in this article to understand that scarcity is, as social historian Elizabeth Blackmar before us has said, historically contingent. In an island worth $825 billion dollars, a mixture of technical expertise and political willingness to act both in favor of people’s right to a decent home on the demand-side and against created interests on the supply-side are rather necessary to solve the urgent housing problems of New York City, which have only aggravated since the beginning of the Great Recession.

References