A Skyscraper Boom may be an Early Recession Indicator

Posted by PITHOCRATES - January 14th, 2012

Week in Review

It takes a long time to build buildings.  Especially tall ones.  It takes large sums of money.  Environmental impact studies.  Lots of time to design it and produce contract documents.  Then there’s the bidding process.  Contracts.  All of this before they even break ground.  So it’s a very long process.  Then the building starts.  Which can take years.  So that’s a lot of years between financing commitments and occupancy.  This is why the construction industry is typically the last industry to enter a recession.  And the last to emerge from a recession.  So knowing this what can we learn from a skyscraper boom (see Skyscrapers ‘linked with impending financial crashes’ posted 1/10/2012 on BBC News Business)?

There is an “unhealthy correlation” between the building of skyscrapers and subsequent financial crashes, according to Barclays Capital…

“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,” Barclays Capital analysts said…

Investors should be most concerned about China, which is currently building 53% of all the tall buildings in the world, the bank said.

A lending boom following the global financial crisis in 2008 pushed prices higher in the world’s second largest economy.

In a separate report, JPMorgan Chase said that the Chinese property market could drop by as much as 20% in value in the country’s major cities within the next 12 to 18 months.

We get skyscraper booms during good economic times.  When interest rates are low.  And real estate bubbles are beginning to grow.  Cheap money gives us housing booms and high housing prices.  Then the inflation kicks in.  Inflating those real estate bubbles.  As inflation fears build they increase interest rates.  This increases the cost of buying those new homes.  Which, of course, leaves a lot of those new homes unsold.  With more homes for sale that there are buyers looking to buy only one thing can happen.  Prices fall.  Bubbles burst.  And recession sets in to correct prices.

While the economy collapses into recession those skyscrapers limp along.  Too late to stop.  And too costly to cancel.  Instead they’ll complete them.  On the exterior, at least.  And there they’ll stand as monuments to the folly of cheap money.  With thousands of square feet of empty office space.  Or rents slashed to get enough people into them to at least pay for the maintenance of these great buildings.

China has some problems.  Some big ones.  They have a shrinking trade surplus thanks to the weak demand in Europe and America.  Some inflation fears.  And now what looks like a real estate bubble being primed to burst.  Which may very well bring a recession China.  And it will be an economic crash heard round the world.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , ,