Risky high risers

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LEE HAN SHIH

This September, the Burj will be completed in the United Arab Emirates, making it the world's tallest building. Yet it seems everytime a record-breaking skyscraper goes up, the financial market in the country goes down. theasiamag.com measures the Curse of the Skyscraper Index.

What is the likelihood that Shanghai will be hit by a recession next year?

If a leading indicator is anything to go by, the chance is pretty high. After all, the Skyscraper Index has correctly predicted major business downturns for the past 100 years. As predictive indicators go, it has a far better record than most of the mainstream ones, be it the conventional GDP measures or more esoteric instruments such as the Elliot Wave, which links women’s hemlines with stock market movements.

Created in 1989 by Andrew Lawrence, an economist with the investment bank Dresdner Kleinwort Benson, the index has uncovered what Lawrence called “a century-long unhealthy correlation”. With the onset of the 20th century, every time a record-breaking skyscraper goes up, the financial market in the country goes down.

Just look at 1908 to 1909. Two of the world’s first skyscrapers were built in New York City: the Singer Building, which in 1908 was the tallest in the world. A year later it was overtaken by the Metropolitan Life building. The completion of the buildings were preceded by the Panic of 1907, which wiped out hundreds of small firms and caused bank failures up and down the US.

To prevent a similar happening, the US Congress created the Federal Reserve. It did not help. By the late 1920s, optimism was running so high that three even taller buildings were under construction. The first, 40 Wall Street, was completed in 1929, followed by the Chrysler Building in 1930 and the Empire State building in 1931. By then, of course, the Great Depression, which started in 1929, was well under way and would continue for years, despite the best efforts of the Fed to rescue the economy.

Fast forward to 1972. Another wave of prosperity, and another three tall buildings in the US were nearing completion. The first two were the twin towers of the World Trade Center, which were up in 1972 and 1973 and destroyed in the blink of an eye on September 11, 2001. The Sears Tower in Chicago was capped in 1974. Their arrival coincided with Nixon’s decision to take the US dollar off the Gold Standard, the soaring oil prices and a terrible bear market on Wall Street.

After that, the undertaking of superlative buildings moved East, where Asian countries, drunk with their newfound prosperity, started to compete with each other in building edifices in the middle of slums. Asia may be separated by thousands of kilometres from the US, but it could not escape the curse of the Skyscraper Index.

Singapore, which completed the world’s tallest hotel (81 storeys, then called the Westin Stamford) in 1985, was plunged into a short recession soon after, its first in more than a decade. In 1997, its neighbour Malaysia celebrated the arrival of another set of twin towers, the Petronas Towers in the heart of Kuala Lumpur, which for a time were the tallest buildings in the world.

The raising of the Petronas Towers heralded the arrival of the Asian Currency Crisis, which spread from Indonesia to Malaysia, Thailand and Hong Kong. Taiwan, which recovered rapidly from the crisis, created one of its own making — its Taipei 101 currently carries the title of the world’s tallest building — with the island itself now mired in one financial catastrophe after another.

China, on the other hand, was relatively untouched by the crisis.

Perhaps it had something to do with the fact that an attempt to build the world’s tallest building in Shanghai, originally scheduled to open in 1997, was delayed.

Now the same project is moving rapidly to completion in Shanghai. Next year the 101-storey Shanghai World Financial Centre, built by Mori Building Contractor of Japan, will open its doors. At 492m it will be the tallest in the world, but only for a year, as the Burj in the Gulf state of Dubai, which stands at 705m, will be completed in 2008.

Will markets in Shanghai and Dubai, now the fastest expanding in the world, contract next year and the year after?

No one knows, of course. And many have scoffed at Lawrence’s Skyscraper Index as unscientific. Nevertheless, it would be unwise to dismiss it out of hand.

Tall buildings, after all, reflect the mental state of their developers and financiers. To undertake a tall building, with a lead time of four to eight years, requires a leap of faith. To undertake a building of record height, and to be able to convince the money men to finance it, would suggest the market has reached a state of over-investment and over-confidence.

As Lawrence explained: “Skyscrapers tend to cap off a significant building boom, one that often reflects monetary expansion and a bubble.”

He was not the only one to say so. A study by Mark Thornton, a Senior Fellow of Ludwig von Mises Institute, not only links tall buildings with financial market movements, but also with the inexorable rise and fall of business cycles as predicted three centuries ago by an Irishman called Richard Cantillon.

Certainly Shanghai is a bubble in the making. Despite the best efforts of the central and provincial governments, property prices in China’s biggest city have been rising to what many consider to be unrealistic levels. Last year the Shanghai property market experienced a temporary cooling after the authorities introduced a series of tough anti-speculation measures. But with increased liquidity — partly caused by Middle Eastern petrodollars moving from the increasingly hostile West to a more friendly China — prices in Shanghai are again on the rise. The bubble has gotten bigger.

If the Skyscraper Index is right on the money yet again, this bubble will burst next year. Its impact could be far-reaching. The Shanghai property market is intimately linked to its stock market and, from there, to the entire Chinese financial market. The repercussions of a property collapse could spread to all corners of China, just when the country is gearing up for its biggest-ever public relations event, the hosting of the Olympics in Beijing in 2008.

It is hard to tell whether the Chinese authorities believe in the Skyscraper Index, or whether they have even heard of it. But by all accounts they are well aware of the terrible consequence of a property market crash in Shanghai and have taken steps to contain the potential damage.

Meanwhile, across the border, the Indian government has become the latest to get into the act. It is now planning to build the world’s next tallest building. The building, in a New Delhi suburb called Noida, will be 710m tall, almost half as high as the Shanghai World Financial Centre. It is designed to resemble the peaks of the Himalayas and will open for business in 2013.

"We want this building to show the world what India can do," Hafeez Contractor, a famous Indian architect, proudly told the newspapers, blissfully omitting the fact that Kuwait is planning to build an even taller building (250 storeys), to be completed in the 2020s. The wheel of fortune continues to turn.

First Published:

March 2006

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