Wednesday, February 27, 2013

Sky Scrapers As A Economic Bubble Measure

I read an article on Mises, as well as listened to the podcast, concerning the viability using sky scraper commercial real estate construction, specifically skyscrapers, as a measurement for the business cycle.  Since the advent of those gleaming towers of brick, glass and steel, the christening of the next 'worlds tallest' has often coincided with the peak of whatever economic bubble existed the time.

Table 1: World's Tallest Buildings
Completed Building Location Height Stories Economic Crisis
New York
612 ft.
Panic of 1907
Metropolitan Life
New York
700 ft.
Panic of 1907
New York
792 ft.
40 Wall Street
New York
927 ft.
Great Depression
New York
1,046 ft.
Great Depression
Empire State
New York
1,250 ft.
Great Depression
World Trade Center
New York
1,368 ft.
1970s stagflation
Sears Tower
1,450 ft.
1970s stagflation
Petronas Tower
Kuala Lumpur
1,483 ft.
East Asian
1,509 ft.

 Above is the chart I pulled from the article, and it looks like there is something to this idea. Now the announcement of a worlds largest building didn't always mean that an economic occurred, sometimes it didn't, but that is because I don't think the announcement of a super tall necessarily indicates an economic bubble. I'm not disagree with the ultimate conclusion from Mises, in fact I agree with it, rather, given what I have seen from commercial real estate, I think I can explain it.

The reason why so many super talls coincide with economic crashes is that many of those super talls were announced during a period of very vigorous real estate development.  The author, in the podcast, likened commercial real estate development like the development of the railways in the 19th century, I couldn't agree more with this assessment.  One thing we need to understand about inflation, which is simply more money entering the money supply than can be supported by economic production, is that it doesn't happen all at once. The funds are often allocated to bubble areas first, as investments, and then gradually spill over, like water flowing from on overfull pond into another pond, into other aspects of society.

We saw this with the tech and residential bubble, which was heavily pushed by easy money policies of the Fed, as the stock markets and housing markets saw massive sustained gains well outside of their historic 100 year norms.  This is one of the reasons why inflation was so low, though the CPI understates inflation in my opinion, from the mid 1990s to now. While some of the money being inserted into the market did end up affecting consumer products, most of it had made it's way into the real estate and stock market; in the Captain has argued, rightly in my opinion, that continued gains in the stock market is nothing more than money being pumped in the system, i.e inflation.

This means that the development of real estate projects, and perhaps skyscrapers development in general, are a good indicator of an economic bubble or at least peak economic cycle. Skyscrapers are rather costly developments, with substantial risk as they are rarely constructed with a 100% pre-lease agreement, and are usually only undertaken during periods of high economic activity or irrationality.
In my own city, while there had been development of some downtown apartments, no commercial skyscrapers had been developed until now, there wasn't a market for there.  A few months ago there have been a few announcements for speculative office construction. Now I love skyscrapers so I think this is cool, but I cannot deny, that this might be indicative that our economic "boom" since 2009 has run it's course.


  1. I agree. There's no reason to build a 100-story building when there are abandoned strip malls in the nice neighborhoods.
    In the end everything comes back to the supply meeting the demand.

  2. You've explained this better than anyone else I can think of.

    Could you also clarify what velocity of money is and what M1, M2, and M3 are in terms of money stock?


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Seattle resident whose real name is Kevin Daniels. This blog covers the following topics, libertarian philosophy, realpolitik, western culture, history and the pursuit of truth from the perspective of a libertarian traditionalist.