New York City — home to the rich, famous, and sky high real estate prices. With median home prices of $1.3MM, Manhattan boasts some of the most expensive real estate in the world. As the financial capital of the global economy, price levels have been supported by high paying jobs in the financial sector. In my last article, I mentioned New York City real estate investors should be weary in the upcoming months as hiring trends shift. As the financial sector becomes increasingly automated, the number of ultra-high-end paying jobs have dwindled. This has forced a budgetary compression for property owners in NYC, where less people are able to afford the increasing supply of luxury condos in Manhattan. I argue that this is largely due to the Bitcoin bubble and burst, which created incentive for innovation by the banking sector to shift hiring towards people with Blockchain and banking automation experience.
Isn’t there a strong economy?
Taking a look at the FRED data, we can observe a steady rise in condo prices in New York, NY until the peak in March 2018. As the largest economic center for the United States; this can be expected as unemployment fell to record lows, rising wages continued, and tax breaks provided stimulus for the working class. The sharp reversal of this trend, as measured by the condo price index, initiated in Q2 of this year. This breaks away from fundamental economic theory, with little rational explanation until this point. In this time frame, the NYC condo price index dropped ~ 2%, while GDP rose ~4.1% for the United States. Much of this growth has been fueled by rapid investments into states such as Tennessee. Despite this, the NYC Comptroller’s Office reported 2.7% GDP growth pacing ahead of a reported 2% inflation for the city.
Unemployment is at record lows, what about that?
The chart above represents data from the New York State Department of Labor. The chart highlights monthly YoY % employment changes across 6 sub-sectors of the financial services industry in New York City. Out of the 6 sub-sectors listed, the Securities Brokerage category has consistently cut headcount the most. This is expected, as they have been some of the first to fall victim to automation with the rise of discount brokerages, and trading platforms such as Robin Hood. The largest change over the last 6 months however, has been employment in the Investment Banking and Securities Dealing sector. After approaching a peak of 4.7% YoY labor growth in October 2017, employment growth has slowed rapidly in the sector. Coincidentally, this is the month where we experienced the beginning of the Bitcoin bubble. As the banking sector scrambles to stay ahead of the trend, investment in client facing people has taken a hit. This cascade has forced a “brain drain” from the banking sector, into emerging industries such as Blockchain, AI, and Cannabis.
Where does this all fit in?
The chart above represents a time series for the price of Bitcoin, relative to the US dollar over the last year and a half. Taking a look at the data, the peak of the bubble occurred in December 2017, with stability regaining after 3 months. As investment dollars flowed out of a volatile Bitcoin market during these 3 months, FRED data shows the highest % increase in condo prices for NYC during that same time frame. According to a Corcoran report, the average number of days a home was on the market in NYC was 121 days, or ~4 months. That laggard syncs nearly perfectly with the analysis, from the height of the Bitcoin bubble in December, to the initial decrease in condo prices in March. This trend has also been supported by the reduction in headcount growth, for New York’s highest paying financial jobs, as top talent jumps ship to new industries.
The “brain drain” implies that workers are sacrificing higher wages, for long term equity in start-ups, increasing the need for individual budget cuts. These cuts have forced a decrease in demand for high-end real estate, as former providers of multi-million dollar bonus checks, have shifted their focus on investing in new technologies. As banks invest in their own automation technologies, they will be able to directly compete with decentralized blockchain payment networks, whose transaction fees are a fraction of our current banking system. As JP Morgan’s CFO Marianne Lake puts it, “We [Chase] are a technology company.”