Did you know that there is a tight correlation between the completion of the world’s tallest skyscraper and either a recession or a depression within a year or two? Well, there is. Dr. Mark Thornton of the Mises Institute published an article on this in 2005. Worldwide, real estate peaked in 2006. Then came the Great Recession.
Bernanke and the other Federal Reserve senior members did not see this coming. They argued against any such real estate crash right up until it took place.
Recently, a mainstream source discovered what Austrian School economists had figured out in 2005. There is a connection between the construction of the tallest skyscrapers and the business cycle.
Barclays Capital published a report this week that explained something about hubris that we all probably knew without knowing it: Countries that have the confidence to build the tallest skyscraper of their era are likely headed for a fall.
Barclays does not tell us why. Austrian economic theory does. Monetary inflation creates a boom. Capital pours into zones of the economy that rise in anticipation of long-term price inflation. This creates bubbles. Real estate is a favorite, except after a crash. When monetary inflation at last slows, the boom sectors burst.
According to a story by the BBC, Barclays is reporting an “unhealthy correlation” between the building of skyscrapers and subsequent financial crashes. Examples include the Empire State building, built as the Great Depression was underway, and the current world’s tallest, the Burj Khalifa, built just before Dubai almost went bust.
China is currently the biggest builder of skyscrapers, the bank said, and India also has 14 skyscrapers under construction.
China’s stock markets are down about 25% since last summer. So is India’s.
The 74-story Longxi International Hotel is an example of the excess in the tiny village of Huaxi in eastern China — a rural burg of just 2,000 families, according to the London newspaper The Guardian.
Where is the Europe’s tallest building under construction today? London.
The BBC noted that the findings might be a concern for Londoners, who are currently seeing the construction of what will be Western Europe’s tallest building, the Shard. It will be 1,017 feet upon completion.
China is the most likely economy for a real estate crash.
Investors should be most concerned about China, which is currently building half 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, the BBC reported that 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.
Then there is home sweet home. Mukesh Ambani’s home is 27 storeys tall and cost about a billion dollars. It takes 600 staffers to keep it running smoothly.
“Today India has only two of the world’s 276 skyscrapers over 240 meters in height, yet over the next five years it intends to complete 14 new skyscrapers,” according to Barclays Capital.
Get ready for a crash in Asia. That will produce investment opportunities of a lifetime.