Do China’s New Skyscrapers Really Signal An Economic Downturn?

Do China’s New Skyscrapers Really Signal An Economic Downturn?

Skyscrapers have been symbols of economic plenitude since Daniel Burnham, the architect behind some of the earliest tall buildings, said “Make no little plans; they have no magic to stir men’s blood.” But is it possible that tall buildings also precipitate crashes? According to one analyst, yes — and China, in particular, is heading for a bust.

The concept is called the Skyscraper Index, and it was named in a 1999 paper by economist Andrew Lawrence, who showed how the construction of record-breaking skyscrapers has long correlated to economic busts. It’s a pretty simple idea, really: As interest rates go down, construction of office space increases to accommodate expanding companies. It gets less expensive to build, so developers push higher and higher. Finally, as the boom peaks, a saturated market and anxiety over a bubble bring the whole thing grinding to a halt.

Graphic by Bloomberg Businessweek.

And, as Lawrence proved, the Index seems to hold up under scrutiny — it extends all the way back to the early 1900s, when the Panic of 1907 coincided with the construction of two record-breaking towers. The pattern continued, with the Empire State Building completed just before the crash of 1929, which sent the country spinning into the Depression. Same with the original World Trade Center, completed just before the 1974 Stock Market Crash, and the Burj Khalifa, and dozens of other supertalls. A 2011 meta-analysis called into question the idea that there’s a real correlation, but confirmed that building height and economic growth are related.

The mastermind behind the Index, Lawrence, was in the news again this week after arguing that China is on the verge of an economic slowdown. According to him, supertall construction projects like Sky City, a planned tower in Hunan province which will become the world’s tallest building if completed, foretell a bust. Speaking to CNN, Lawrence (who now heads up Hong Kong and China property research at CIMB Group) had this to say:

China will be building over 40 per cent of the world’s skyscrapers over the next four years so clearly there’s a building bubble… The Skyscraper Index has a good 150-year correlation between the world’s tallest buildings and economic slowdowns and recessions. For China, there is no reason that correlation will change.

China has had a slow month — but so far, there’s no real indication that they’re heading for a fall. We’ll have to wait and see whether, as Lawrence predicts, their GDP will fall as Sky City climbs. [CNN]

Image via Ritholtz.