Constrained supply, continuous demand and wealth beyond imagining: There’s a reason New York City real estate is the most expensive in the country.

Easy lending, a weak dollar and gobs of Wall Street money pushed already sky-high Manhattan property values into the stratosphere during the housing boom. Now, finally, after the rest of the country has succumbed to the housing crisis, the city that never sleeps could be facing a real-estate crash of its own.

According to Bloomberg, commercial real-estate transactions plummeted more than 60% this year; lending has dried up and buyers have backed off. Despite all the fundamental reasons for New York real estate to remain strong, it’s Pollyanna-ish to believe it will remain an island of calm in an economy deteriorating by the day - especially when the epicenter of the economic calamity can be found at the southern tip of the island.

Tuesday, Toll Brothers (TOL) CEO Robert Toll issued a dour outlook for Manhattan property prices: “Up [till now], New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country… I would expect the financial business in New York to probably lose 100,000 people.”

Toll went on to explain that “The foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was… what with the euro going down in comparison to the dollar lately, and with their own economic crisis."

And when New York City real estate goes, it goes big.

The last housing slump in Manhattan began in at the end of 1987 and lasted for nearly 10 years. During that time, according to data compiled by quadlet.com, prices fell 40%. Adjusted for inflation, they tumbled almost 60%.



The New York Metro area is poised for a similar fall. According to the S&P Case/Shiller Home Price Index, home prices have slipped just 6.9% in the last year, compared with 26.7% in the Los Angeles area, 27.3% in San Francisco, and 9.8% in Chicago.

As the housing slump spreads into previously strong markets, these pockets of strength are starting to crack.



The longer credit markets remain under duress -- and when firms like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are laying off ever more employees in their ongoing cost-cutting efforts -- the deeper the slump is likely to be. A strengthening dollar and floundering economies around the world will continue to keep foreign buyers away.

What goes up, must come down.