Why Is Manhattan So Expensive?

Over the past 20 years, the price of apartments in Manhattan has increased twice as fast as the rest of the nation. This has not been the case historically. Between 1950 and 1980 real prices in Manhattan remained relatively flat.

This study finds that the difference between pre-1980 Manhattan and today is increased regulatory constraints on housing supply. From 1980 onwards, there has been a marked drop off in the number of new apartments in Manhattan—despite a growing economy, robust demand, and escalating prices. By restricting the supply of new apartments, these regulations exert a “zoning tax” on housing prices that is responsible for much of the high cost of housing in Manhattan.

This study estimates the amount of the zoning tax by measuring the gap between real estate prices and housing construction costs. It finds that:

• The physical cost of construction for high-rise apartment buildings in Manhattan ranges from $150 to $200 per square foot (ft2).
• Prices for both owner-occupied and rental units in Manhattan are two to three times above construction costs. Between 1984 and 2002, the mean and median condominium sales prices in Manhattan were about $468/ft2 and $455/ft2, respectively (in 2002 dollars). Prices were higher still during the last year of the study sample, in which the median price was $606/ft2 and the mean price was $621/ft2. The prices for cooperative units were $382/ft2 during the 1990s.
• 50% or more of the total price of the median Manhattan condominium—or $200+/ft2—is attributable to the zoning tax. For cooperative units the zoning tax is $110/ft2 for the median unit, and $182/ft2 at the mean. This translates into a tax of 25% and 48%, respectively.
• Half of the condominium owners in our study incur capital costs from the zoning tax ranging from $5,000 to over $25,000 per year.
• Some restrictions on development are beneficial, since they can prevent overcrowding, traffic congestion, or a severe drain on local services. In that sense, the zoning tax should be set equal to the additional costs new residents impose on a community. But analysis shows that the cost of current zoning regulations on Manhattan housing prices far exceeds any benefits that they might confer. On net, the study finds that an efficient zoning tax for Manhattan condominiums should be less than 20%. The current zoning tax in Manhattan is 50% on average, roughly three times the social costs generated by new development.

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