Deflation: A Sky-High View

Residential real estate prices in major global cities rebounded sharply during the current bull market, especially at the high-end. Now, real estate developers grapple with price deflation. At least one real estate indicator is flashing a bigger warning than it did in 2007.

The bull market of the past eight years has prompted a lot of expensive residential high-rises in New York City.

But, even as stocks marched toward record-high territory, deflation's tug was being felt. EWI's August 2016 Elliott Wave Financial Forecast said:

Real estate is another asset class that is particularly vulnerable to deflation. ... When it comes to luxury residential real estate, the borough of Manhattan is the key global bellwether. According to the New York Times' latest assessment, "New York City's ultraluxury real estate frenzy -- with its sky-piercing condominium towers and $100 million price tags -- has finally come to an end."

Now, there's further evidence that the price trend for luxury Manhattan residential real estate is downward.

Here's a Dec. 6 Bloomberg headline:

NYC's Tallest Luxury Tower Is Discounting Condos by Millions

The article notes that at 432 Park Ave., buyers who completed purchases in 2016 received an average 10% price reduction. A recent buyer of an 88th floor penthouse received a 20% markdown (yet still paid $60.9 million).

But even bigger discounts may soon be in the offing as "a wave of luxury condos is coming to Manhattan just as interest from investors slackens."

And New York is not the only global city that's seeing weakness in its residential real estate sector.

Review this chart and commentary from EWI's December 2016 European Financial Forecast:

Rental Market Softens London

London rental prices are softening, as the chart shows. After hitting an all-time high above 5% in 2012, average yearly price gains of private rental houses fell below 2% in 2014, then hit a countertrend peak in August 2015, and are rising at just 2.6% today. ... Property valuations have yet to reflect an honest account of the sector's damage, because "many would-be sellers have yet to concede on price."

In addition, consider London's number of construction cranes.

The title of this chart from the November 2016 European Financial Forecast says it all: "Construction Crane Explosion Bigger Than 2007."

Construction Crane Explosion Bigger than 2007

Deloitte's London Office Crane Survey, which tracks every project under construction across central London, showed an eye-popping 51 new projects underway in the first quarter of 2016, the highest number in the survey's 20-year history.

Like New York, it appears the stage is set in London for an even faster decline in real estate prices in the months and years ahead.

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