Skyscraper index points to trouble for China

While cruising around the web this morning, I came across a great blog, Brazilian Bubble, which is a bit like a Brazilian version of MacroBusiness.

Upon trawling their recent posts, I stumbled across the Barclay’s Capital Skyscraper Index, whose latest report was released last Month.

According to Wikipedia, the Barclay’s Capital Skyscraper Index is explained as follows:

The Skyscraper Index is a concept put forward in January 1999 by Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein, which showed that the world’s tallest buildings have risen on the eve of economic downturns. Business cycles and skyscraper construction correlate in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready for recession.

The buildings may actually be completed after the onset of the recession or later, when another business cycle pulls the economy up, or even cancelled. Unlike earlier instances of similar reasoning (“height is a barometer of boom”), Lawrence used skyscraper projects as a predictor of economic crisis, not boom.

According to the latest Skyscraper Index report, China is leading the way, with 53% of all skyscrapers currently under construction:

Our Skyscraper Index continues to show an unhealthy correlation between construction of the next world’s tallest building and an impending financial crisis…

…often the world’s tallest buildings are simply the edifice of a broader skyscraper building boom, reflecting a widespread misallocation of capital and an impending economic correction.

Investors should therefore pay particular attention to China – today’s biggest bubble builder with 53% of all the world’s skyscrapers under construction…

China will complete 53% of the 124 skyscrapers under construction over the next six years, expanding the number of skyscrapers in Chinese cities by a staggering 87%. China’s skyscrapers are not only increasing in number – it now has 75 completed skyscrapers above 240m in height – but the average height of the skyscrapers that it is building is also increasing as past liquidity fuels the construction boom.

In addition, to the increase in size and number of China’s skyscrapers, their geographic profile is also changing. Today over 70% of China’s skyscrapers are unsurprisingly clustered in the more economically advanced coastal areas of the Pearl River Delta and the Yangtze River Delta. Yet between now and 2017 over 50% of China’s skyscrapers will be built inland as China’s building boom moves from first-tier cities to second- and third-tier cities. Over 50% of China’s skyscrapers are today in tier 1 cities, and based upon current completion plans about 80% of China’s new skyscrapers will be built in tier 2 and 3 cities over the next six years – evidence of the expanding building bubble…

Barclay’s also singles-out India, which is number two on the Skyscraper Index with 14 skyscrapers under construction:

Yet China is not alone in the growth of its building bubble, India it seems is playing catch-up. Today India has only two of the world’s 276 skyscrapers over 240m in height, yet over the next five years it intends to complete 14 new skyscrapers, in what will prove to be its largest skyscraper building boom. Worryingly as well, India is also constructing the second tallest building in the world, the Tower of India, which should complete by 2016.

The writing, so to speak, would seem to be already on the glass curtain walling. For if history proves to be right, this building boom in China and India could simply be a reflection of a misallocation of capital, which may result in an economic correction for two of Asia’s largest economies in the next five years.

Interesting stuff indeed.

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Comments

  1. The skyscraper index should be somewhat weighted to population size or population movement from lower class to middle class.

  2. I suppose the building of Skyscrapers would be akin to when Churches were built in the bygone era. IE The Richest countries of the day would have built the biggest and prettiest Churches.

    • The statues on Easter Island might be akin too http://www.eisp.org/

      Jared Diamond’s description of them from an article in Discover Magazine (1995):
      “Easter Island’s most famous feature is its huge stone statues, more than 200 of which once stood on massive stone platforms lining the coast. At least 700 more, in all stages of completion, were abandoned in quarries or on ancient roads between the quarries and the coast, as if the carvers and moving crews had thrown down their tools and walked off the job. Most of the erected statues were carved in a single quarry and then somehow transported as far as six miles–despite heights as great as 33 feet and weights up to 82 tons. The abandoned statues, meanwhile, were as much as 65 feet tall and weighed up to 270 tons. The stone platforms were equally gigantic: up to 500 feet long and 10 feet high, with facing slabs weighing up to 10 tons.”
      http://discovermagazine.com/1995/aug/eastersend543

      From a paper by John Brätland:
      “Diamond offers the following conjectures on the motivations behind the fact that these statues seemed to increase in size as time progressed. “The increase in statue size with time suggests competition between the rival chiefs commissioning the statues to outdo each other. … I cannot resist the thought that they were produced as a show of one-upmanship.””
      http://mises.org/journals/scholar/bratland5.pdf

  3. It’s all fascinating until you accept that every year someone wants to build something bigger or more grand than what has come before, so naturally before any bust, work is being carried out on the latest monolith somewhere on the globe, and then when growth slows the project is shelved or goes into bankruptcy, until it’s revived later when it has been bought for a written down value.

    The index will hold true in 2010 2011 2012 2013 2014 2015 ad infinitum.

    Dare I say that Joh Bjelke Petersen was smarter than Mr Lawrence – he simply counted the cranes on the city skyline and used that as his economic index.

    It was the Joh index –

    many cranes – good economy

    No cranes – bad economy

    http://www.qbr.com.au/news/articleid/48621.aspx

    • Not many (office) cranes in Sydney CBD at the moment.
      .
      PLENTY in Melbourne. Will be more in Brisbane soon.
      .
      Yes, Perth CBD is being transformed. Vacancy getting close enough to 0% again for Premium and A-grade space. Lots of demand (for now).

      • Well the Joh index suffered because he didn’t account for the lag in either a pickup or a downturn.

        Often the economic consequences of halting construction of a large tower are far greater than carrying on and hoping for the best.

        Still it did have some merit.

        One:
        There is a correlation between home renovation and economic activity, that would be much more immediate because it is small out of pocket expenditure.

        When people believe that their house prices are increasing they will spend out of their pockets (or on plastic) to put in a new kitchen or loo, paint the house etc – Adds value in their eyes and they feel good.

        When house prices are falling they do still spend but for a different reason, and not nearly as much – IE they can’t afford to upgrade to a better home – equity levels may not permit it – it’s not the change over cost for some people, it’s the added equity they can contribute from a sale during the good times.

        Given some detailed data and some spending analysis I think that a “Bunnings Index” might give you a key to spending on either “spruicing up the home” or “making do” with the home. There will be a slightly different spending pattern between the two, and the volumes will be different. When home values rise there is usually a rush of small renovations.

        I’m a Bunnings fan and I always ask the checkout staff how busy they are. Perhaps streaming photos of their carpark from a CCTV camera?

        Two:
        I have a client who owns quite a large building and pest inspection concern in SE Qld – occasionally I phone him to get feedback on how busy he is. Now that almost every house sale is accompanied by a building and Pest Cert the volumes should have relevance, and the data source is unlikely to talk the figures up although there is an interest in the market. They are not salesmen per se.

        That could be worth investigating if you used a large franchised concern with an area spread and a solid computer system able to generate some reliable data monthly or continuously. Sales drives would throw the numbers out, but still it would give trend indications.

      • Once tried to compile a “new Porsche sales” index against sharemarket …. without much success! 🙂

      • How about an Index Index. On the theory that the more the financial industry takes over from the real economy, the more indices we have and the more in the s**t we are.

  4. Leith, I note the reference to the Brazilian blog. Are you going to do a posting on Brazil’s housing bubble?

    I know little or nothing about this.

    Here’s something juicy from France that I had missed until recently.

    Vincent Benard: “Land Use Regulation and Its Impacts in France”

    http://www.objectifliberte.fr/2009/04/land-use-regulation-and-its-impacts-in-france.html

    Also worth a look from the same author:
    “A State Made Paradox: Simultaneous Housing Shortages And Vacant Homes”

    http://www.objectifliberte.fr/2012/02/housing-shortages-and-vacant-units.html