New York City has been a housing market paradox over the last two years: with declining population and falling rent, the city is clearly facing a decline in demand. But with rent levels still extremely high and construction in the city and suburbs throttled by regulation, the city seems poised to grow if ever those regulations were lifted.
The decline in demand for New York living seems to be real. The Census Bureau’s annual county population estimates released last week showed a second consecutive year of population decline. Rent also fell from July 2017 to July 2018, according to Zillow, dropping 3.3 percent in Brooklyn, 2.5 percent in Manhattan, and one percent in Queens. Several of the suburban counties around New York also lost population and had falling or stagnant rent and home prices.
The population decline, which has reduced New York City’s population by 77,000 since July 2016, is a sharp reversal from the boom the city experienced between 2010 and 2015. Population and prices surged in all five boroughs. Even with the recent decline, New York’s population remains 2.7 percent above its 2010 level.
New York’s experience was unique: the other large East Coast metros all grew in 2018. Of the 48 counties in the Boston, Philadelphia, Baltimore, and Washington, DC metros, only four registered population drops, compared to nine of the 24 New York area counties.
Despite the demand decline, the high cost of New York living is also real. Rent is higher in the New York metro area than in any other East Coast metro. Vacancy rates in New York are far below the national average, so the drop in demand has not been enough to overcome the decades-long supply shortage.
The paradox can be reconciled by recalling from Econ 101 the real-world interpretation of a demand curve. A demand curve gives a relationship between quantity and price: how many people would choose to live in New York if average rent were $3,000 a month for a typical apartment? How many at $2,000? How many at $1,500?
The recent drop in demand suggests that at current prices, the number of people willing to live in New York dropped. But the same demand curve implies that at lower prices, the population would be far greater. Academic estimates suggest that housing demand rises three percent for every two percent drop in rent. That does not mean that a drop in demand will reverse itself, but it does mean that if New York and its suburbs allowed housing supply to increase substantially, the population gains would dwarf the recent losses.
New York should not prepare for a long-term decline: the early indications are that the housing market is already on the comeback trail. The Zillow Rental Index shows a sharp rebound in New York City rents beginning in late 2018 and continuing through February 2019, the most current data available. If demand has indeed bounced back, next year’s population figures for the Big Apple will return to positive territory.
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