How did Brooklyn get so damn expensive to live in? An investigation

(excerpt from Chapter 3 of The Brooklyn Wars)

Brooklyn has always had its haves and have-nots. It’s a disparity that is, in many places, written into the very geography of the borough: You can see it most clearly when driving the Brooklyn-Queens Expressway, which carves an unstoppable swath through every neighborhood in its path except for one: Brooklyn Heights, which it swerves delicately around on a double-decked structure, in order to avoid inconveniencing the powerful residents who, even in the 1950s, had superior access to the New York Times letter to the editor page.

In recent years, however, there’s been a dramatic increase in New Yorkers’ economic disparity. One favorite tool of economists in discussing inequality is the Gini Index, a measure of the degree to which income is disproportionately hogged by certain members of a group. (A Gini score of 0 means everyone earns exactly the same; 1 would indicate all income going to a single person.) In New York City, the Gini score as of 2012 was .504 — identical to Swaziland, an absolute monarchy in southern Africa whose king owns 60 percent of its land.

That’s not to say that living in New York — or Brooklyn, which was virtually identical in inequality at .499 — is like living in dire African deprivation. One limitation of the Gini index is that it measures only inequality, not poverty: If a city of perfectly equitable earners suddenly had Bill Gates move to town, its Gini score would leap upwards, even though none of the existing residents would have seen their well-being change at all.

While demographic data for residents moving in and out of specific neighborhoods is sadly lacking — there’s no Census category for “newly arrived in Bushwick, earning enough to afford $3000-a-month rents” — there are some statistical methods for at least getting a better glimpse at who’s entering Brooklyn as a whole, and who’s leaving. The Internal Revenue Service, for one, is able to track taxpayers by both income and county of residence, and its numbers are illuminating. Among newly arrived households in Brooklyn for the year 2013, for example, the biggest source of new residents was Manhattan (13,889 households); their average income was a whopping $85,394, more than 50 percent higher than the Brooklyn average. And that paled in comparison to those relocating from other large cities: Chicago’s 621 Brooklyn transplants averaged $125,522 in income, with San Francisco (422, $124,972) right behind.

For those leaving the borough, meanwhile, the average income level of all families that moved out of Brooklyn between 2012 and 2013 — 64,082 households, or about one Brooklynite in fifteen — was $52,612, just slightly under the borough-wide average. In that figure, though, was contained two very different kinds of migrations: The 2,178 households that moved from Brooklyn to Long Island’s suburban Nassau County earned an average of $76,384. And the most common destination — Queens, with 11,907 ex-Brooklyn transplants — had an average income for migrants of just $39,890, while in the Bronx (3,437 ex-Brooklyn households) new arrivals averaged a mere $26,683.

One question frequently asked by many New Yorkers while watching the rising tide of newcomers in recent years has been: Where are all these well-off people coming from? By 2012, there were 389,100 millionaires living in New York City — nearly as many as there had been in the entire United States three decades earlier. And while most of the city’s rich remained residents of Manhattan, Brooklyn was rapidly moving up the charts in terms of well-off residents: The number of Brooklyn households earning more than $200,000 per year — enough to put them in the top 5 percent of U.S. households — nearly doubled just from 2005 to 2012, from 20,026 to 39,332, despite the intervening economic crash.

Certainly, the United States as a whole was swarming with an awful lot more rich people than it had a generation prior — and the new rich were a good bit richer than the old. As New York Times tax reporter David Cay Johnston described it in his 2004 book Perfectly Legal, “In 1977, the richest 1 percent of Americans had as much to spend after taxes as the bottom 49 million. Just 22 years later, in 1999, the richest 1 percent — about 2.7 million people — had as much as the bottom 100 million Americans.” And this was not merely a matter of the rich outpacing the gains of the poor, because the poor hadn’t gained at all: Between 1977 and 1999, the poorest fifth of American households saw their average income actually fall from $10,000 to $8,800.

This trend of a diverging top and bottom of the income scale was more than three decades old by May 2011, when Columbia University economist Joseph Stiglitz wrote an article in Vanity Fair titled, “Of the 1%, by the 1%, for the 1%.” “It’s no use pretending that what has obviously happened has not in fact happened,” it began. “The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent.” Virtually all U.S. Senators and most members of Congress, he wrote, “are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. … It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.”

Four months later, the Occupy Wall Street movement flipped Stiglitz’s terminology on its head, as young protestors camped out beneath financial district towers holding signs reading, “We Are the 99 Percent.” And if the myriad Occupy encampments largely fizzled out within a year, they succeeded in making growing inequality a national talking point. The rich, it was clear, had gotten much, much richer; the only question was why.

One obvious suspect was tax policy. The top U.S. marginal tax rate — the share of each additional dollar earned that had to be sent to the IRS — was a whopping 88 percent from the end of World War II until 1963 and remained as high as 70 percent through 1980. Then Ronald Reagan was elected, and took aim at slashing top income tax rates; by the time Reagan left office, the top rate was a mere 28 percent, and it has never risen above 40 percent again since. (These are marginal rates, keep in mind: Even under Jimmy Carter, millionaires didn’t pay 70 percent of their income to the government, just 70 percent of their last dollar earned. According to data compiled by the Tax Foundation, in 2010 American millionaires paid out about 23 percent of their total income in income taxes.) The tax rate on capital gains, meanwhile — a form of income that almost exclusively goes to the rich — fell from 35 percent in the 1970s to as low as 15 percent starting in 2003, resulting in huge tax savings for anyone who received payment via, say, stock options. (Stock options began playing a major role in rising inequality following another Reagan policy move, wherein his Security and Exchange Commission removed limits on corporations buying back stock, something that University of Massachusetts-Lowell economist William Lazonick identified as a major factor in reducing corporate spending on employee wages and instead shifting it into corporate compensation.) A 2013 paper by Thomas Piketty and top U.S. inequality researcher Emmanuel Saez and Stefanie Stantcheva concluded that lower tax rates didn’t encourage the rich to work any harder — but it did create an incentive for them to seek much higher compensation, now that they knew they’d be able to keep it.

Even 20,000 additional well-off households, though, should have been a drop in the bucket in a borough of 2.5 million people. But an increased concentration of wealth can create ripple effects far beyond the wealthy. One trend often noted anecdotally among Brooklynites has been the appearance of young newcomers with slight salaries but large cash reserves — “trustafarians,” in the local patois. If a wealthy New Yorker buys a Brooklyn residence for him- or herself, that’s one home taken off the market — though potentially a home that otherwise could have housed several apartments’ worth of people. (In early 2016, a twenty-two-unit, five-story Brooklyn Heights apartment building was put on the market as a potential single-family home “with four bedrooms, a gym, an 800-bottle wine cellar and a roof terrace.”) If the same person also buys two or three apartments, both as a place to park their money and a way to give their grown children a Brooklyn address, the effect of their spending goes up by an order of magnitude.

Meanwhile, it became increasingly clear that not all of the newly purchased housing was necessarily even being occupied. With concentrations of global wealth rising almost as fast as in the U.S., large cities like New York, London, Paris, and San Francisco began to see an influx of international housing buyers who were more interested in investment properties than in a place to live. In Vancouver, with a stable economy, large Asian population, and easy access to China’s fast-growing crop of rich businesspeople, locals began talking of entire “zombie neighborhoods” where as many as one quarter of all apartments were unoccupied by their owners. In early 2015, the New York Times detailed how multimillion-dollar condos at the recently built Time Warner Center at the southwest corner of Central Park were being snapped up by the global rich, including “government officials and close associates of officials from Russia, Colombia, Malaysia, China, Kazakhstan and Mexico.” For wealthy Russians looking for a place to stash possibly ill-gotten gains, the Times noted, “a New York condo serves as a double parachute — a safe-deposit box of sorts, and a soft landing spot should the climate back home turn inhospitable or dangerous — even if that apartment sits dark and vacant for most of the year.”

In some places, almost the entirety of buildings seemingly served as investment properties. The Fort Greene block of Myrtle Avenue cleared of local stores by John Catsimatidis, for example, eventually turned into the Toren condo tower in 2010, just in time to fall victim to the economic crash. Instead of lowering prices and being forced to take a loss, however, its builders marketed it to Chinese nationals looking for investment properties to squirrel away their money — with the result that more than half the units ended up being sold to buyers with Chinese surnames.

New York’s housing market has long been especially attractive to investors, explained Johnston, because of the city’s historically low property tax rates. This is in part a result of the state’s longstanding 421-a program, which offered long-term property tax breaks to developers of new buildings, resulting in lowered tax bills for 150,000 city apartments. (One of the beneficiaries, Johnston noted: Yankee slugger Alex Rodriguez, whose annual tax bill on his $6 million Manhattan apartment was just $1,200 a year, about one one-hundredth what it would have been for a comparably priced suburban mansion.) As a result, he explained, for absentee investors, “the cost of warehousing that apartment is virtually nothing.”

“Real estate is a very attractive asset to invest in,” agreed the Independent Budget Office’s Sweeting.  “So you’ve got a lot of very wealthy people with a lot of money and they may be buying it to use for part of the year, but they’re also buying it because it’s a good place to park their money.” And while that may have been a bigger factor in Manhattan than Brooklyn, he notes, when more people cache their money in Manhattan real estate, “that pushes other people further out into parts of Brooklyn.”

Eventually, Sweeting and his fellow governmental researchers hit upon a clever trick for determining the city’s total number of absentee owners. In 2012, the city had changed its law on a tax abatement for co-op and condo owners: Where previously it had been available to anyone, henceforth it would only be allowed if the apartment was the owner’s primary residence. By comparing the numbers of tax abatement recipients before and after the tax law changed, the researchers could estimate how many apartments weren’t being lived in full time by their owners.

The resulting numbers were eye-opening. Twenty-four percent of co-op and condo apartments citywide, the budget office determined, were not the primary residence of their owners. Not all of these were strictly “pieds-à-terre” for out-of-towners to use on visits: Some were mere investment properties, and some were rentals by original building owners after a co-op conversion. But the 24 percent figure was likely an undercount to begin with, since the researchers were unable to include many recently erected buildings where, thanks to 421-a, residents couldn’t apply for tax breaks for the simple reason that they weren’t paying property taxes in the first place due to special deals cut for new construction.

Elsewhere in the city, meanwhile, additional housing units were being effectively taken off the market by another phenomenon: the rising use of apartments as unregulated hotel room rentals via Airbnb. On an average day, according to the data-scraping site insideairbnb.com, New York City had about 30,000 homes for rent, more than a third of which were in Brooklyn. And the vast majority of these were in the hot neighborhoods in northern and western Brooklyn: Williamsburg, Bushwick, Fort Greene, Crown Heights, and Park Slope. Bushwick alone offered 1,251 listings — in a neighborhood of 20,000 total housing units — with an average price of $133 a night, triple what the neighborhood’s average renter would pay.

Short-term stays drive up rents in two ways. First off, they take vacant units off the rental market, driving down supply and forcing renters to pay whatever they have to in order to get one of the remaining apartments. (A 2015 study comparing Airbnb listings with Census data found that in some extra-desirable neighborhoods like Williamsburg, more than 20 percent of vacant apartments were being listed on Airbnb.) And second, Airbnb rentals enable residential buyers to underwrite higher purchase prices by converting one of their bedrooms — or for buyers of multiunit buildings, one of their apartments — into a hotel room, thus driving up the price of housing.

All these apartments being gobbled up by various means meant higher housing costs for those who were left to cram themselves into the city’s remaining spaces. (With vacancy rates hovering around 3 percent, New York City has technically been in a state of “housing emergency” for more than forty years.) More than a third of New Yorkers live on incomes below 150 percent of the official poverty line, and in a city where two-thirds of residents rent their homes, having an influx of people willing and able to outbid you for your apartment has a huge impact. As of 2008, according to New York University’s Furman Center for Real Estate and Urban Policy, three out of ten New York households paid more than half their income on rent, a situation officially designated as “severely rent-burdened.”

For Brooklyn, with its combination of many poor residents and newcomers eager to move in, housing costs became a particular crisis in the early years of the twenty-first century. According to a report by the New York state comptroller’s office, the percentage of Brooklyn renters paying unaffordable housing costs — defined by the federal government as more than 30 percent of a household’s income going to housing — jumped from 43 percent in 2000 to 52.5 percent for renters in 2012. And Brooklyn homeowners weren’t much better off: 46.7 percent of residents who owned their own homes were in the same boat, for a total of more than 90,000 Brooklyn families whose housing costs had become newly unmanageable in the intervening twelve years.

“As increasing numbers of households face housing costs above the affordability threshold,” the comptroller’s report concluded with bureaucratic understatement, “the consequences may include reduced potential for economic growth and troubling impacts on New Yorkers’ quality of life.” The troubling impacts, needless to say, would be vastly different depending on which New Yorkers you were talking about.