The news agencies delighted in reporting in the news yesterday that Barclays Capital had published their version of the Skyscraper index. According to a study by Barclays Capital, the mania for skyscrapers over the last 140 years is a sure indicator of an imminent crash. They point out that the construction boom that created New York’s Chrysler and Empire State buildings preceded the New York crash of 1929 and Great Depression.
More recently, Dubai has built a forest of sky-scraping offices, hotels and apartment buildings, including the world’s tallest, the Burj Khalifa, before it got into dire financial difficulties. In 2010 Dubai had to be bailed out by its neighbour, Abu Dhabi, to avoid going bankrupt.
Andrew Lawrence, director of property research at Barclays Capital in Hong Kong, said:
Thankfully for the world economy, there is not currently a skyscraper under construction that is planned to overtake the height of the Burj Khalifa. Building booms are a sign of excess credit.
BarCap said signs of trouble were escalating in China and India. China had the dubious distinction of being the world’s “biggest bubble builder,” as it erected ever more and higher towers, it said.
Home to 53% of the 124 skyscrapers now under construction globally, China is primed to increase its stock of them by 87%. About 80% of new buildings are going up in cities away from developed coastal areas of the Pearl river delta and Yangtze river delta, which Barclays called “evidence of the expanding building bubble”.
Lawrence, who was lead author of the report, said China’s property market is already wobbling;
If history proves to be right, this building boom in India and China could simply be a reflection of a misallocation of capital, which may result in an economic correction for two of Asia’s largest economies in the next five years.
This misallocation of capital notion is worth exploring deeper as it can illustrate that a secular economic cycle has run it’s course, capital only has the last (arguably unhealthy) refuge of property to pour into and as the sub prime collapse proved as a store of value property is not as safe as “bricks and mortar”. Notwithstanding the poor returns, (measured versus the equity markets), once capital is ‘concreted’ into property it can stay locked in for some time, preventing the healthy recycling of capital into other sectors of industry.
The basic theory of the over commitment and misallocation of funds for property follies can trace it’s roots back centuries as empires fell due to over extension. As ‘recently’ as 1999 the research director of the firm then known as Dresdner Kleinwort Wasserstein put forward a detailed study of the phenomena. Prior to his theory the Skyscraper indicator preceded it, and this report, in the 1930’s, was created by none other than the creator of the Elliot Wave Theory, our very own Ralph Nelson Elliott.
The Skyscraper Index was a concept put forward in January 1999 by Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein, which showed that the world’s tallest buildings have risen on the eve of economic downturns. Business cycles and skyscraper construction correlate in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready for recession.
The buildings may actually be completed after the onset of the recession or later, when another business cycle pulls the economy up, or even cancelled. Unlike earlier instances of similar reasoning (“height is a barometer of boom”, Lawrence used skyscraper projects as a predictor of economic crisis, not boom.
Lawrence started his paper, The Skyscraper Index: Faulty Towers, as a joke (emphasised by a title referencing a UK comedy show of the 1970’s) and based his “index” on mere comparison of historical data, primarily from the United States experience. He dismissed overall construction and investment statistics, focusing only on record-breaking projects.
The first notable example was the Panic of 1907. Two record-breaking skyscrapers, the Singer Building and Metropolitan Life Insurance Company Tower, were launched in New York before the panic and completed in 1908 and 1909, respectively. Met Life remained the world’s tallest building until 1913. Another string of super-tall towers; 40 Wall Street, Chrysler Building, Empire State Building, were launched shortly before to the Wall Street Crash of 1929.
The next record holders, World Trade Centre towers and Sears Tower, opened up in 1973, during the 1973–1974 stock market crash and the 1973 oil crisis. The last example available to Lawrence, Petronas Twin Towers, opened up in the wake of the 1997 Asian Financial Crisis and held the world height record for five years. Lawrence linked the phenomenon to over-investment, speculation and monetary expansion but did not elaborate these underlying issues. The concept was revived in 2005, when Fortune warily observed five media corporations investing in new skyscrapers on Manhattan (none of them, including the tallest New York Times Building, broke any records).
The simple concept, publicised by business press in 1999, has been cross-checked within the framework of the Austrian Business Cycle Theory, itself borrowing on Richard Cantillon’s eighteenth-century theories. Critics dismissed the skyscraper index as an unreliable tool: the post-World War I recession, recession of 1937 and the early 1980s recession were not marked by any record-breaking projects.
Construction of Woolworth Building (world height record 1913–1930) was marked by a local overbuilding crisis in New York City in 1913–1915 concurrent with a record construction boom in Chicago. Critics argue that the completion of Woolworth Building was followed by a third-worst-ever quarterly decline in gross domestic product, thus it should not be considered an exception from the rule (as Lawrence himself did).
In “normal” times when the value of resources is predictable, performance of a building project can be estimated reliably through well-tested formulae. In boom times, rational pricing gives way to irrational buyers’ behaviour; buyers bet on ever-increasing demand and rents and are willing to pay more than they would normally.
Height is a barometer of boom, the tallest buildings generally appear before the end of a boom, their height driven up by the speculative fever that affects both developers and lenders, cyclically inflated land values as the principal factor for increases in building height. Critics do not elevate these facts and the phenomena to be an “index”..