The Return of the Skyscraper Index

Twelve years ago Andrew Lawrence, then a Hong Kong-based property analyst for a British investment bank, formulated what he called the Skyscraper Index, correlating construction of the world’s tallest skyscrapers with economic crises going back to 1873.

Although the Index is somewhat fanciful, it has proved remarkably accurate. And, if the past is any prologue, China had better prepare itself for trouble. Lawrence, now a director for Barclays Bank Hong Kong, has updated the Index and asks whether China is building its way into a bubble.

Over the next six years, Lawrence writes, “China will complete 40 percent of all the new skyscrapers under construction, expanding the number of skyscrapers in Chinese cities by over 50 percent.”

That is occurring as many economists worry that Chinese economic officials are too far behind the curve and that inflation, featuring expanding of money supply and easy credit and overinvestment, is out of control. Steve H. Hanke, professor of applied economics at Johns Hopkins University in Baltimore, Maryland, estimates that 64 million apartments are lying empty in China. That is enough empty housing to accommodate 192 million people.

Skyscraper construction, Lawrence says, “has been characterized by long periods of inactivity intersected by short periods of erratically timed, intense building, typically coinciding with excessive monetary expansion in the global economy.”

The first was the Equitable Life Building in New York, which was completed in 1873 at a then-skyscraping 142 feet (43.3 meters). Completion was followed immediately by a recession in the United States and Europe that lasted for five years and is known historically as the Long Depression.

The Auditorium Building in Chicago and the New York World Building, completed in 1889 and 1890 respectively, coincided with the British banking crisis of 1890 and a world recession.

And so it went. Three record-breaking New York skyscrapers built between 1929 and 1931 – including two of the world’s most iconic buildings – kicked off the Great Depression of the 1930s. They were The Empire State Building, the Chrysler Building and 40 Wall Street.

The completion of the World Trade Center towers in New York in 1972 – later to be brought down by Al Qaeda-commandeered airplanes -- and the Sears Tower in Chicago in 1974 “marked a period of US currency speculation, the collapse of the Bretton Woods system and the OPEC price rises that caused an economic crisis across the world.”

The building of the Petronas Towers in Kuala Lumpur, the first of the world’s tallest buildings to be built outside the United States in 130 years, coincided with the Asian Financial Crisis of 1997.

And of course the Burj Khalifa, formerly called the Burj Dubai, 2,717 feet tall and 162 storeys, has coincided with the mother of all global financial crises dating back 70 years.

“Thankfully for the world’s economy,” Lawrence writes, “there is currently not a skyscraper under construction that is planned to overtake the height of the Burj Khalifa.”

That doesn’t mean there won’t be local hotspots. In October, Najib Tun Razak, Malaysia’s prime minister, announced plans to build a 100-storey skyscraper, taller than the Petronas Towers, at 88 storeys and 452 meters high. This is occurring at a time when bankers, economists and property analysts say Malaysia’s property sector is already sluggish and could take decades to absorb the overhang. Former Prime Minister Mahathir Mohamad, who drove the construction of the Petronas Towers, has questioned the plan.

“While completion of the world’s tallest buildings might symbolize the extent of economic expansion and the height of hubris,” Lawrence writes, “skyscraper building booms of geographic concentration have been consistent signals of economic excess; the world’s tallest buildings rarely stand alone.”

Looking forward, he continues, “China appears to be creating its own building cluster of skyscrapers for completion in 2013 through 2015. China’s skyscrapers are becoming ever higher and are increasingly being built across China, rather than the traditional Tier 1 (cities) concentration we have seen to date.”

For investors, he says, “this concentration of skyscraper building should raise concerns. History inplies that this is a sign of economic over-expansion and misallocation of capital, which will result in an economic correction within the next five years. Whether this correction will actually occur is obviously impossible to know...unless of course China announces that it is about to start building the world’s next tallest building.”