The Cheat Sheet

The higher they go, the harder they fall

| Updated on: Aug 17, 2016
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The pole-vaulters at the Rio Olympics?

Not really. I’m talking about realestate developers obsessed with building the tallest skyscrapers. Most recently, the authorities in Shenzhen in southern China, who announced last week that they would build China’s tallest skyscraper: a 2,422-foot-tall building.

But bigger is better, right?

Height was once considered a “barometer of boom”. That’s probably why developers the world over are caught up in schoolboyish mine’s-bigger-than-yours mindsets. But recent research shows ‘vanity projects’ such as skyscrapers are precursors to economic crises.

Really? Any empirical evidence?

There is. In 1999, property market researcher Andrew Lawrence whimsically compiled a ‘Skyscraper Index’, which suggested that skyscraper projects are indicative of a very large economic boom that typically ends in a large recession. More specifically, there was a strong correlation between the completion of the world’s tallest building and economic crisis.

But don’t all economies go through boom-bust cycles?

They do, but Lawrence established, with research going back to the late 1800s, that skyscraper projects tend to mark the top of the cycle: they start in an upswing and finish in recession.

Enough theorising. Hit me with evidence.

Here goes: the world’s first skyscraper, the Equitable Life Building in New York was completed in 1873; it coincided with a five-year recession in the US from 1873. In the late 1920s and early 1930s, there was a rash of skyscraper projects in New York: 40; Wall Street in 1929; the Chrysler Building in 1930; the Empire State Building in 1931. This coincided with the Great Depression. Similarly, in the 1970s, the completion of the twin towers of the World Trade Centre in New York and the Sears Tower in Chicago coincided with the ‘oil shock’ economic crisis.

Hang on. It seems to be an all-American phenomenon.

Not at all. The completion of the Petronas Towers in Kuala Lumpur in 1997 — the first of the world’s tallest buildings to be built outside the US in over 100 years — was followed by the Asian financial crisis. And in 2007, the Burj Dubai (later called the Burj Khalifa) became the world’s tallest building; and, of course, in 2008, the global financial crisis unfolded. I could go on and on.

I’m still missing a causal link.

You’re right to be skeptical. After all, correlation is not causation: the occurrence of two events doesn’t establish that one causes the other. Also, there are exceptions to the ‘Skyscraper Index’ theory: Woolworth Building in 1913 in New York, and Taipei 101 in 2001. But libertarian economists argue that it is not entirely lacking in economic merit. Economist Mark Thornton, of the Austrian School, notes that “both the causes of skyscrapers reaching new heights and severe business cycles are related to instability in debt financing”.

What does all this mean — for China and India?

Lawrence himself suggests that the Skyscraper Index serves at best as a “useful anecdotal guide”, not as a surefire way of identifying a turn in economic cycles. To that extent, it is nobody’s case that building heights can be used as a guide to fiscal and monetary policy or that skyscraper heights should be limited to prevent economic crises.

But particularly in economies like China (and, to a lesser extent, India), vanity skyscraper projects should trigger alarm bells of a building bubble that is peaking. At that point, if I were an investor, I’d take my money and run.

A weekly column that helps you ask the right questions

Published on January 17, 2018

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