News flow in 2020 sure has started with a bang. Each week has unveiled developments that may have a real impact on the New York City real estate community; some promising, some not so much. In this edition of the Katzen Report, I will to do my best to summarize these new developments, which include policy shifts, global health concerns, environmentally-driven initiatives, and income, in an effort to make sense of this whirlwind year and understand how these issues could impact the landscape of New York City real estate. And to think, it’s only February . . .
Before getting into the aforementioned 2020 news flow, I wanted to take a quick minute to highlight something in the 2017 tax reform that may not be widely appreciated based on my conversations with clients. As you know, in high tax states one of the most controversial parts of this tax plan was the severe $10,000 cap on the ability to deduct state and local income taxes (known as “SALT”) against Federal income taxes (for a refresher on the topic, I dedicated a full Katzen Report Issue 74 to this when the tax reform was enacted.). It is important to note that this not only includes real estate property taxes but state and local income taxes as well. While the latter is more of general cash flow and affordability issue (and technically not specific to real estate), in states with high-income taxes (a la NY and NYC), it can be a much more significant blow than property taxes. Given real estate tends to be one of a consumer’s larger purchases, less after-tax income, regardless of the driver, is less than helpful. While some of this effect is offset by lower Federal tax rates that were enacted, many high earners are “net-net” slightly worse off, and the cosmetics and publicity of the SALT cap initially created uncertainty and fear.
Now, what I wanted to highlight today is a subtle difference in the business and personal elements of the tax reform changes. As it relates to the tax changes for businesses, those were made permanent. In other words, new legislation is necessary to make changes. However, what seems less obvious to many is the tax changes on the personal side “sunset” on December 31, 2025. This means that even without the introduction of new tax law, tax policies will revert to those that existed prior to the 2017 changes. While this means that federal income tax rates with rise, it also means that the cap on SALT deductions will disappear. To me, this opens up a greater number of paths for this to become reality-a Democratic White House and Congress, OR simply gridlock. The latter is something we’ve seen quite a bit of in recent years, and in a “sunset” construct such as this, a “do nothing” Washington actually would yield change.
While I realize this is several years away, in my experience, smart buyers, sellers, and investors begin reading the tea leaves and making decisions well in advance of the actual changes. Thus, if this is the direction the market begins to anticipate a year or two out, real estate should feel an anticipatory bounce. Of course, given 1) a number of Republicans in high tax states also oppose the SALT cap, 2) there are a number of Congressional elections before then end of 2025, and 3) we live in a world of (re) negotiation, you can’t rule out an actual proactive rewrite before 2025 (let’s just hope the cap is not removed only for lower- income earners). One can dream . . .
While we’d all agree that the coronavirus is very sad as a health matter, the true global economic impacts are widely debated. To this end, on February 11 th the South China Morning Post published an article titled, “Property markets reel from coronavirus outbreak as Chinese investors pause transactions.” The article states some of the preferred destinations of Chinese property buyers are witnessing a lull in activity as they surmise it is more difficult for Chinese investors to buy property overseas. Markets such as Thailand and the US are reeling from the halt in activities and interest coming from the Chinese, underscoring the impact of the outbreak on the sector.”
This is a very logical conclusion, as the virus clearly has impacted travel and stolen focus from other activities (like real estate buying I would presume). After all, health risks usually take priority. Personally, I already have seen a closing delayed as a result of travel complications. The real question surrounds the longevity of this serious situation, which remains a wild card. I certainly will be monitoring this situation closely and will pass on any relevant developments as they unfold. If it’s any indication, the performance of the equity and credit markets suggest a belief that the virus impacts will be relatively short-lived. I guess the same could be said for all other geopolitical risks as well . . .