Rich People Can Be Very Stupid Too

Harry S. Dent | Monday, November 18, 2013 >>

There was an article in The New York Times recently entitled “Globe’s Richest See Bargains in New York’s Newest Towers.” It talked about the penthouse in the new 432 Park Avenue building that just went for $95 million.

That’s a bargain?!

Then there was that 6,250 square foot condo in Manhattan’s One57 tower that went for $67 million. That’s almost $11,000 per square foot!

Do I misunderstand the concept of a bargain? Or is my definition of the word wrong, maybe?

I don’t think so. I think it’s more likely that we have a case of rich-people-being-stupid going on here.

And I know they’re going to experience a world of hurt when the very bubble they’re buying into bursts…

I’ve written before about how new, taller skyscrapers always tend to get completed right near the top of major long-term real estate bubbles, which in turn tend to come near peaks in major generational cycles.

For example, builders completed the Chrysler building, the Empire State building and 40 Wall Street right around the time real estate peaked in 1929. And we all know what that particular year is famous for.

Builders completed the Transamerica building in San Francisco, the World Trade Towers in New York, and the Sears building in Chicago right near the major top in 1972.

The famous Petronas Towers in Kuala Lumpur were completed in 1997, at the major top in Southeast Asia.

And there was the once-tallest building in the world, Dubai’s Burj Khalif at 2,717 feet that builders completed in 2010, just after the bubble peaked and collapsed there.

Today, the tallest building in the world is under construction in… you guessed it… China. Sky City is destined to be 2,749 feet tall, with completion scheduled for 2014.

So what does any of this have to do with New York?

Everything, actually.

The new World Trade Center is going up at a record 1,776 feet.

In the residential sector, the city recently underwent a renaissance, upgrading to new, taller condo buildings.

The first was 15 Central Park West, completed in 2008. Last year a Russian financier paid $88 million, or a record $13,049 per square foot, for a penthouse there.

He bought it from Sandy Weill, the former chief of Citigroup, and paid double what Weill paid for it just four years earlier.

The next was One 57, which reaches 1,004 feet. It’s the largest residential tower and one of its penthouses just sold for $90 million.

56 Leonard may be the coolest looking, modern, glass and steel structure with odd-shaped condos near the top. It’s due for completion in 2015 and will reach a height of 821 feet. This past June, someone bought one of the penthouses there for $47 million.

But the crown jewel in all of this craziness is the new 432 Park Avenue building. At 1,396 feet it’s the tallest residential building in New York.

It too is due for completion in 2015. One of its penthouses is on the market for a record $95 million. The typical, one-floor condo is going for $7,000 a square foot here.

Anyone smell a bubble top here? I certainly do.

Now, rich people are, of course, entitled to do what they want with their money, no matter how crazy it seems to the rest of us. But when we have the next major crash on Wall Street, property prices are going to crash like crazy, particularly for these kinds of luxury apartments and condos.

I’m talking a 60% to 80% crash in those prices.

Just imagine the world of hurt those recent buyers will be in when that happens. I don’t care who you are or how rich you are… to suffer a blow like that will knock the wind out of anyone.

But who are these crazy people buying these “bargains?”

No surprises here… it is Wall Street and corporate executives, hedge fund managers, and of course, foreign multimillionaires and billionaires from Britain, Russia, China, Brazil, and the Middle East.

The richest people are under the classic delusion that the most bubbly and expensive places can’t go down because they are so special… so unique… so well placed in terms of location.

Unfortunately for them, exactly the opposite is true. The greatest bubbles burst the most, regardless of where they are or how special they are.

Mark my words: The most expensive properties in the U.S. (and the world) will ultimately crash and burn the worst.

Don’t say we didn’t warn you.

Harry

P.S. As you know, over the last few weeks we’ve asked you to complete a survey so we could get a better idea of what your concerns are. Armed with that information, we plan to find new ways to help you overcome those worries. Now, the results are out. And here they are:

  • 57% of you say economic uncertainty is your major concern… more so than taxes, Obamacare or regulations.
  • And 67% say cash flow and marketing are major challenges.

Thank you for your participation in our survey.

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About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.