The Hidden Costs of the World's Ghost Apartments; across the Globe, the Superwealthy Are Snatching Up Palatial Apartments and Driving Up the Cost of Living

By Johnston, David Cay | Newsweek, April 24, 2015 | Go to article overview

The Hidden Costs of the World's Ghost Apartments; across the Globe, the Superwealthy Are Snatching Up Palatial Apartments and Driving Up the Cost of Living


Johnston, David Cay, Newsweek


Byline: David Cay Johnston

Take an evening stroll on either side of New York's Central Park and you will notice how few lights are on in the newer apartment buildings. That's because no one lives there.

Across the globe, empty luxury apartments darken many of the most desirable cities--Miami; San Francisco; Vancouver, British Columbia; Honolulu; Hong Kong; Shanghai; Singapore; Dubai; Paris; Melbourne, Australia; and London. The reason: The world's richest people are buying these grand residences not to live in but to store their wealth. In Paris, for instance, one apartment in four sits empty most of the time.

Some of these wealthy owners are looking for status, others a good investment. And for rich people in unstable countries, or those whose incomes depend on dubious businesses, holding real estate in foreign countries functions as private insurance.

Either way, the growing demand for luxury housing illustrates some of the adverse effects of the concentration of wealth at a time when worldwide wages are mostly stagnant. Because these palatial apartments and homes are rarely occupied, they impose a host of hidden costs on locals, including higher rents, longer commutes and fewer retail shopping choices. In some cities, notably New York, locals subsidize absentee owners.

The displacement of locals by the global superrich has prompted political leaders in San Francisco, Shanghai, Vancouver and New York, among other cities, to consider ways to ease the distorting effects of a relatively few wealthy people on the economies of their cities. In Singapore and Hong Kong, officials tried to slow the spread of absentee-owned luxury housing by limiting mortgages.

Welfare for the Wealthy

These days, people who enjoy rivers of cash flowing into their accounts are having a hard time finding profitable investments in enterprises that make things or sell services. Holding money in banks is unattractive because the planet is awash in so much cash, interest rates are at historic lows. Instead of paying interest, some large cash deposits now incur bank charges.

This economic environment makes luxury apartments an attractive option to warehouse wealth. So long as other rich people are buying, owners enjoy the prospect of selling their units someday for a big profit. Many of these absentee owners buy their units through companies they control, transforming what would be personal after-tax operating costs into tax-deductible expenses. The prospect of higher prices encourages developers to buy and demolish existing buildings, often with the aid of government's power of eminent domain, which allows them to force existing owners out, paying them off at a discount.

What's also propelling this trend is the growing number of superwealthy people. There are far more billionaires than the 1,826 on the latest Forbes global list. Forbes primarily counts liquid wealth, mostly concentrated ownership of publicly traded companies that must be disclosed. Thus Forbes misses many more private and diversified fortunes. And for every billionaire, there are many more millionaires to whom the cost of a luxury apartment is little more than pocket change. Billionaires typically own 10 residences each, according to Knight Frank, a global real estate consulting firm. That means, statistically, that each of those residences sits empty 47 weeks per year unless friends or business associates use the space.

Some of this demand to own--but not live in--fancy apartments is vanity. But owning, not living in, a luxury apartment is especially attractive when the locals subsidize the costs. This welfare for the rich is done through subtle mechanisms few know about or understand.

In New York state, the average property tax on single-family homes and townhouses is 2 percent of their assessed value, and in some counties, rates exceed 4 percent. But New York City's property tax on new apartments is a trifle. …

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