Is anyone actually home? Photographer: Victor J. Blue/Bloomberg

How Ukraine Could Alter New York's Skyline

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Here's a wrinkle you may not have thought about in Russia's recent Ukrainian adventures: its impact on real estate in New York City, where rich foreigners apparently now account for an astonishing number of purchases:

There are no official figures, but anecdotally, about 40 percent of the condominium and townhouse buyers in Manhattan are foreigners, and more than half of buyers in new developments come from overseas, according to Jonathan J. Miller, the president of the appraisal firm Miller Samuel. It is unclear what percentage of that total is Russian, but Russian buyers have dominated the news in recent years, along with buyers from China and Brazil.

The prospect of Russian cold feet couldn't come at a worse time, as condominium prices at the high end of the market are surpassing levels reached during the peak of the last real estate boom, and developers are buying up sites at a frenzied pace. New projects, planned with billionaire foreign buyers in mind, are altering the landscape of the city. Perhaps most notable is the spate of super-tall, narrow towers in the works along West 57th Street, their long shapes casting a shadow on Central Park.

This obviously should not have factored into the Barack Obama administration's thinking on Ukraine; I'm pretty sure New York will survive just fine without a few fewer ultraluxury apartment buildings. But it does illustrate a fascinating change in the real estate markets of a handful of world cities -- London, Paris, New York.

Normally, when you look at how high real estate prices can go in a place, you're ultimately constrained by local incomes. This is why I caution New York transplants not to look at price appreciation on Capitol Hill and extrapolate that to a scenario in which the whole city looks like Brooklyn. Washington has a lot of very affluent people, but it does not have a lot of very rich people. In most places, the top of the market consists of two lawyers who make good-but-not-great money by New York standards.

Even in New York, however, the megarich are in short supply. You may think that there are far too many Goldman Sachs Group Inc. bankers pulling down a million a year in salary and bonuses. But compared with, say, doctors, the actual number of those people is pretty low -- it would not fill more than a few blocks' worth of high-rise apartments.

Unlike most cities, however, New York is not limited to local talent. Its real estate prices are constrained by the total supply of very rich people in the entire world -- or, let's say, the majority of the world where citizens are allowed to buy New York City real estate. Globalization is producing a lot of those people, though not so many that a foreign-policy crisis can't crimp the style of local developers.

This may be bad for developers. But it might be good for the city. Oh, don't give me that look -- I'm not against capitalism, or a free market in real estate. But outside of construction jobs, the ultrarich don't add much to the city -- their apartments sit vacant for most of the year, which means they don't generate demand for much except one-time construction jobs. String enough of those together and you'll kill the streetscape; I'm told that some areas of London now often resemble those eerie empty cities in the China hinterlands. So while I wouldn't want to outlaw foreign ownership, I might also not be sorry to see some of it go.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

(Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.)

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