10 Mar Skyscrapers and Bubbles
Skyscrapers Are A Great Bubble Indicator
Vikram Mansharamani 03.10.11, 3:41 PM ET
One of the first skyscrapers was designed and built by Bradford Lee Gilbert in 1887. It was designed to solve a problem of extremely limited space resulting from the ownership of an awkwardly shaped plot of land on Broadway in New York City. Gilbert chose to maximize the value (and potential occupancy) of the small plot by building vertically. His 160-foot structure was ridiculed in the press, with journalists hypothesizing that it might fall over in a strong wind. Friends, lawyers and even structural engineers firmly discouraged the idea, warning that if the building did fall over, the legal bills alone would ruin him. To overcome the skepticism of both the press and his advisors, Gilbert took the top two floors for his personal offices. From then on, the skyscraper has been a symbol of economic and financial success, the mark of one’s ascent.
It has also been one of the most robust bubble indicators over long time periods–specifically, the world’s tallest skyscraper has been. You may be aware of the Burj Dubai’s ascent as the world’s tallest structure, and the corresponding global credit crunch that soon followed, but few are as familiar with the consistency of the pattern. Consider the following table, which lists the world’s tallest skyscrapers (at the time) and the accompanying financial crisis that struck the market in which it was built.
World’s Tallest Skyscrapers and Related Busts
|Building||Location (Completed)||Spire Height||Financial Crisis|
|Singer||New York (1908)||187 meters||Panic of 1907|
|Metropolitan Life||New York (1909)||247 meters||Panic of 1907|
|40 Wall Street||New York (1929)||283 meters||Great Depression|
|Chrysler||New York (1929)||319 meters||Great Depression|
|Empire State||New York (1931)||443 meters||Great Depression|
|World Trade Center||New York (1973)||526 meters||’70s Stagflation|
|Sears Tower||Chicago (1974)||527 meters||’70s Stagflation|
|Petronas Towers||Kuala Lumpur (1997)||452 meters||Asian Financial Crisis|
|Taipei 101||Taipei (2004)*||509 meters||Tech Bubble|
|Burj Dubai||Dubai (2008/9)**||828 meters||Global Credit Crunch|
*Taipei 101 was financed and construction began in 1999, quite near the peak of the technology boom. **It is interesting to note that the uncompleted Burj Dubai tower was classified as the world’s tallest structure on July 21, 2007, right around the peak of the U.S. market before the financial meltdown.
Why might this indicator be so consistently useful? While there are many likely reasons, two seem particularly striking. Skyscrapers are inherently speculative ventures, in that they are rarely, if ever, built by their intended occupant or with committed tenants. “Build it and they will come” captures the prevailing spirit. Thus you can think of the world’s tallest skyscrapers as indicators of lofty overconfidence. Second, because speculators rarely build such structures with their own money, skyscrapers are powerful evidence of “easy money.” Accepting the importance of these two variables in creating a fertile context for bubble formation, skyscrapers are actually a spectacular indicator of bubbly conditions. The economist Mark Thorton eloquently summarized the context surrounding the construction of the world’s tallest skyscrapers: “First, a period of easy money leads to a rapid expansion of the economy and a boom in the stock market . . . credit fuels a substantial increase in capital expenditures … [and] this is when the world’s tallest buildings are begun.”
While it seems particularly unlikely that the Burj Dubai will be surpassed in height anytime soon, we can look at the tallest skyscrapers under construction to see where money is easiest, speculative juices are flowing and confidence is high. According to Skyscraperpage.com, five of the 10 tallest buildings now under construction are in China. By 2015 the website estimates that Chinese skyscrapers will occupy spots Nos. 2, 3, 5, 9 and 10 of the tallest buildings in the world. Might the booming Chinese economy be susceptible to a bust? Is the skyscraper indicator describing a state of overconfidence and/or easy money?
Manifestations of overconfidence can be found in other speculative endeavors, too, particularly in situations where higher prices drive demand, not supply. This is exactly the case in several Chinese markets, including real estate, garlic and even “mutton fat” jade. In each of them, speculator confidence appears to be running very high.
Likewise, monetary conditions are extremely easy, and negative real interest rates are encouraging many investments that might not be economic at a normalized cost of capital. Consider the virtually empty South China Mall, in Dongguan, China, which has recently decided to expand despite enormous vacancy rates. Or Kangbashi, in northern China, which has been labeled by Time a “modern ghost town.” Misallocated capital? Overinvestment? Sure seems so.
Despite the allure of “it’s different this time” explanations of why China is unique, most of the indicators associated with an imminent bust are present. The Boombustology seismograph is generating lots of activity, indicating that a forthcoming quake may in fact be imminent. Investors and policymakers alike should exercise extreme caution, because chances are high that it’s probably not different this time.
Vikram Mansharamani is the author of Boombustology: Spotting Financial Bubbles Before They Burst, just published by John Wiley & Sons (March 2011).