Should you buy or rent in Manhattan and what are the key financial considerations?
The buy-versus-rent decision in Manhattan favors buying only for households with a multi-year ownership horizon that can absorb high transaction costs, while the quality of the rental market provides genuine alternatives that do not exist in most U.S. cities. The opportunity cost of capital and co-op approval constraints add dimensions to the analysis absent in other markets.
1. Manhattan's high transaction costs make buying financially optimal only for households with a 5-plus year ownership horizon. 2. The rental market in Manhattan provides quality options across price points that do not exist in most other major U.S. markets. 3. Opportunity cost of the down payment in a market with meaningful investment alternatives must be factored into the buy decision. 4. Co-op approval requirements add a non-financial constraint to the purchase process that affects the effective supply available to buyers.
- Average rental prices climbed for the 23rd consecutive month to $4,073
- Average condo prices in NYC are now around $2,662,100; while average prices reach $1.15 million
- Buying is a better option for higher income earners, while rentals are a better short-term solution for those living a couple of years in NYC
New York City only keeps getting better. Infrastructure projects keep improving, commercial spaces are more expensive, demand for residential spaces has only become stronger, and more out of reach for most people. With up to 70% of new construction in NYC being in residential assets and prices increasing since 2010, nearly doubling per Citi Habitat's latest research report, the question of buying versus renting in Manhattan deserves a rigorous financial answer.
While average rental prices climbed for the 23rd consecutive month to $4,073, vacancy rates are at their highest in nine years at 2.82% as of January 2016 figures, and landlords are being forced to offer tenants more concessions on rentals. This trend has increased by almost 8% in Manhattan. Even with this, average rents are up 2.5% since January 2015.
So should you rent or should you buy? The real question becomes whether you are a long-term New Yorker. At $1.15 million, the average apartment needs around 20% down payment and an 80% loan-to-value mortgage to cover the rest. At rates averaging 3.625% APR for a 30-year fixed loan, and with average rent at $4,073, you will break even by your 10th year of owning, including all closing costs at approximately 4%, maintenance and real estate taxes, and a 28% tax bracket.
Focusing only on luxury condos, the average top 10% rental costs $10,673, up 5.8% from the same quarter a year before. The average price of a condo is around $2,662,100, which falls between the average 2-bedroom price of $1,975,000 and a 3-bedroom at $3,855,000 in Manhattan. Surprisingly, one benefits with a 4th or 5th year break-even on luxury condos depending on minor changes in common charges.
Owning a home provides various benefits: real estate is an inflation-linked asset, which is why prices historically trend upward. Mortgage interest, real estate taxes, common charges, and other costs may be tax-deductible. And fully owning your own apartment will make Manhattan a less expensive place to live over the long term.
The buy-versus-rent decision in Manhattan is more nuanced than in most U.S. markets due to the combination of high purchase prices, maintenance costs, co-op and condo approval processes, and the unusually strong rental market that provides quality options for households not yet ready to commit to ownership.
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