The letter of the law taxes buyers, but increased price cuts and concessions will force much of the real cost onto sellers
A condo soaring above New York City’s East River on the 78th floor of Trump World Tower returned to the market one recent Monday after a short hiatus with a revamped sales pitch:
“Take advantage before the mansion tax goes up,” reads the listing for the $5.65 million two-bedroom apartment, a reference to a property transfer tax hike that will hit affluent home buyers in the Big Apple on July 1.
New York City’s so-called "mansion tax" will increase from a flat 1% surcharge on all home sales over $1 million to a progressive tax starting at 1.25% on homes between $2 million to $3 million up to 3.9% on those $25 million or more. While the letter of the law sticks buyers with the bill, it’s more likely that in today’s sluggish housing market, sellers (and developers) will bear the cost of the tax hike in the form of price reductions, more concessions and sluggish sales, experts say.
The very condo at Trump World Tower urging buyers to get in before July shaved $445,000 off its asking price one week after lawmakers approved the new mansion tax at the end of March—making up for the added cost and then some. (The listing agent did not immediately return request for comment.)
“In a soft market, where the seller is already weaker than the buyer in terms of negotiating, it’s going to come out of the hide of the sellers,” said Jonathan Miller, chief executive of Manhattan-based appraisal firm Miller Samuel.
Manhattan sales are down about 25% compared to two years ago and luxury home prices, defined as the top 10% of the market, have declined roughly 15% over the past two years, according to market-wide data from Miller Samuel.
Meanwhile, new inventory continues to pile up. By the end of this year there will be roughly 8,700 unsold new development units across the city. That’s equal to approximately 6.4 years’ worth of product to sell, by Mr. Miller’s estimate.
“That’s high, two years ago it was half that,” he said.
New Yorkers need only look to London to see how higher transfer taxes can hinder price growth. British lawmakers reworked and raised the country’s stamp duty in 2014 to a maximum rate of 12% on home sales over £1.5 million.
The U.K. tax rose to 15% for those registering a home to a company rather than their own name, a common practice among high-net-worth individuals. And in 2016, the country added an additional 3% tax on all second-home and buy-to-rent sales.
“The tax landscape became more adverse for the prime London property market. What tends to happen is that it has an impact on prices and an impact on liquidity, and takes a period of time to wash through the market,” said Tom Bill, head of London research at brokerage Knight Frank.
Prime London home prices reflected the added tax almost immediately. The average sale price flatlined in the year following the new tax before slipping 11.4% from 2016 through 2018, according to Knight Frank’s annual Wealth Report.
Higher transfer taxes were directly responsible for most of the decline in London home values, though political uncertainty surrounding Brexit has exacerbated the slowdown since the end of 2018, Mr. Bill said.
The good news: Housing markets (and buyers) tend to digest a transfer tax hike fairly quickly.
“Once there’s more momentum to the market, the tax will sort of become less at the forefront, mathematically speaking,” Mr. Bill said. When home values are broadly rising again, buyers will see future price appreciation as an offset to the higher transaction costs.
Until then, New York City’s luxury homeowners will have to be more flexible on price, experts say.
“It’s likely that the entirety of the new tax will be borne by sellers,” said Grant Long, StreetEasy’s senior economist. “Sellers will have to adjust their expectations accordingly and make deeper concessions.”
State lawmakers approved the impending tax hike at the end of March as part of New York’s 2019-20 budget. The increased mansion tax marked an unofficial compromise between the state and real estate industry stakeholders, who fought against a proposed annual “pied-a-terre” tax, which was gaining traction. In addition to the mansion tax, New York State also increased the basic transfer tax on homes over $3 million to 0.65%, bringing the maximum rate to 4.55%.
While the new rules levy additional taxes on all home sales over $2 million, the tax hike supercharges at the $10 million mark, jumping from 2.25% to 3.25%. That means a home priced just over $10 million accrues at least $100,000 more in taxes than a home priced just below that threshold.
The tax hikes look particularly grim to sellers or developers with big-ticket homes that already have languished on the market for months (in some cases years).
“Those sellers who have watched their homes linger on the market are likely to be among the most prepared to bend to the realities of the current market and least likely to hold out through the new taxes to find a buyer willing to pay close to full ask,” Mr. Long said.
Some developers have already observed activity shift toward more affordable properties subject to less tax.
That benefits projects like Arbor18, a wellness-focused new development in Greenwood, Brooklyn, where more than 90% of the units are under $2 million, said Vanessa Connelly, vice president of sales at Halstead and who is marketing the building.
Ms. Connelly said she wouldn’t be surprised if there’s a last-minute push to get deals done at the higher end before the tax goes into effect.
“You do have the opportunity related to certain price points to get in before July, especially at the higher end of the market. Why not take advantage?” she said.
That’s certainly been the case at 88&90 Lexington, a new development near Madison Square Park, where interest in quick closings has spiked over the past four weeks, said Beth Stern, a Corcoran agent leading the sales team.
The building recently sold or will soon sell three condos where the buyers stipulated that they needed to close before June. In one case, that meant booting agents from a completed apartment they had used as a sales office.
“The main point of those deals is that everyone wanted to close before June. We have other offers and potential deals who have the exact same criteria,” Ms. Stern said. “The tax has put a little fire under buyers.”