The construction of the world’s tallest skyscrapers is always followed by economic downturn, according to a report last Wednesday by Andrew Lawrence, a property analyst at Barclay’s Capital Research. Barclay’s Skyscraper Index survey referenced an unhealthy link between the construction of skyscrapers and economic downturns.
Lawrence claims that a spike in the construction of skyscrapers and other tall buildings in a country is a precursor to an “impending financial crisis.” He supports his theory by drawing parallels between some of the most prolific skyscrapers during the past eighty two years and the periods of economic collapse that followed. Cited in his report is the construction of New York’s Chrysler Building in 1930 , the Empire State Building in 1931, the tallest buildings in the world at the time, followed by a period of economic calamity: the Great Depression in the United States.
Similarly, the two World Trade Towers in New York and the Sears Tower in Chicago ushered in the economic crisis of 1974, only later to be eclipsed by the construction of Kuala Lumpur’s Petrona Towers and the economic downturn that followed. Rounding out the list was the Burj Khalifa in Dubai with the ensuing economic crisis that followed, culminating in the 2010 bailout by neighboring Abu Dhabi to avoid foreclosure. At 162 floors high, the Burj Khalifa is still the tallest building in the world.
Building Booms are a Sign of Excessive Credit
Barclay’s research notes that historically speaking, skyscraper construction was preceded by bursts of sporadic but intense activity that coincided with easy credit, rising land prices, and excessive optimism. However, by the time the buildings were completed, the economy had fallen into recession.
Feverish construction activity of skyscrapers in China and India may indicate that a real estate bubble in those countries may be bursting sometime in the next five years. “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 of Asia’s economies in the next five years” Lawrence wrote.
China has 53% of all the world’s skyscrapers that are currently under construction. China is poised to increase their skyscrapers by a staggering 87%. Barclays claims that more than half of their new skyscrapers will be built inland and away from the wealthier coastal areas and Pearl River Delta region by 2017. India, which has only 2 of the world’s 276 skyscrapers, plans to complete 14 new skyscrapers, including the Tower of India, the second largest building in the world, which should be completed by 2016, according to Barclay’s report.
All of the new skyscraper construction comes at a critical time in China’s economy when their country is increasingly exposed to global export slowdown and deceleration, especially from Europe. In recent months, China has witnessed a housing market that is beginning to deflate. China’s home prices fell for a fourth straight month while the Chinese government has maintained an ambitious “cool down” approach by raising down payment and mortgage requirements.
According to Lawrence, China’s property sales decreased by 40-50 % in Beijing and Shanghai and developers had slashed prices by 5-20%.
Property prices have skyrocketed over the years in China thanks in large part to widespread speculation by developers along with excessive government support of infrastructure development.
On December 29th Joseph Sternberg, an editorial writer for the Wall St. Journal, wrote an article China’s Year of the Question Mark and questioned whether China’s economy is heading towards crisis as a result of China’s overly ambitious building campaign to become modernized and wealthy.
Concerning the question about whether China can survive the misallocation of capital and credit that led to their construction boom, Sternberg writes, ” It has overbuilt luxury housing (64 million unoccupied apartments), office buildings (25 sq ft of office space for every man, woman, and child), airports, steel mills, railroads, shopping malls, and whole cities.”
He continues, “Few of these projects have a chance of making a positive return on investment. When investors realize they cannot sell or rent their properties, investment stops. And when investment makes up 60-70% of China’s GDP, it is going to experience a depression level contraction that its social fabric is unlikely to withstand.”
Barometer of China’s Growth
Next week China will release their 2011 4Q GDP which is expected to show some contraction. Analysts are expecting 8.7%. China’s 3Q GDP for 2011 was 9.1%.
China’s foreign exchange reserves fell by 20.6 billion in 4Q 2011, according to central bank data released on Friday and posted at Marketwatch. Analysts say that the result may resurface fears of speculative funds in larger numbers exiting the country.