Thursday, June 21, 2012

A More Critical Look at “Skyscraper Index” Theory

          Shanghai Financial District skyline April 2012 -- A harbinger of doom for China?
                        Cranes behind Aurora Tower are on China's future tallest buiilding.

My post on Shanghai merely touched the surface of the discussion and analysis that has taken place about this theory that the completion of new “world’s tallest buildings” tends to coincide with economic downturns. The explanatory hypothesis is that these new world’s tallest buildings are emblematic of the misallocation of capital that fuels commercial real estate bubbles as economic interests take a back seat to inflated egos.

While a similar theory was presented in the early 20th century and had proponents such as eminent urban geographer Homer Hoyt, it became a moot point with the Great Depression and World War II. No new “world’s tallest buildings” were being built between 1931 and 1970, until the spell was finally broken by the World Trade Center in New York.

 As I mentioned previously, the skyscraper index theory was re-introduced in 1999 in a paper with the tongue-in-cheek title of “The Skyscraper Index: Faulty Towers” by research director Andrew Lawrence of Dresdner Kleinwort Wasserstein in response to the Petronas Towers of Kuala Lumpur being completed right as Malaysia and neighbors Thailand and Indonesia were economically collapsing in the famed “Asian Contagion” of 1998.

 Scholarly Research

Some notable academic articles have been published since then to test this theory.

In 2005, Auburn University economist Mark Thornton published "Skyscrapers and Business Cycles" in The Quarterly Journal of Austrian Economics, which is not an Austrian publication, but the publication of a U.S. think tank that explores the libertarian, anti-Keynesian economic theories of such famous Austrian and Austrian-influenced economists as Ludwig von Mises, F.A. Hayek and Joseph Schumpeter.  Although Thornton found the skyscraper index to be less than perfect in predicting economic downturns, he stated “The ability of the index to predict economic collapse is surprising,” and considered it to work better than many other recession predictors commonly relied upon by economists.

In a 2010 article in the same journal, Greg Kaza referred to the Thornton article and added “The tallest or once-tallest buildings in 40 states were completed in NBER-identified contractions.” [National Bureau of Economic Research] Despite his opinion of a high correlation between the skyscraper index and economic contractions, he considered the skyscraper index as “not meant to be a predictor of either economic contraction or financial crisis” but “meant to be a powerful illustration” of the effects of “stimulation by the central bank and the resulting pattern of entrepreneurial error that is revealed in the aftermath.” This is a somewhat political statement, as Austrian School economists are no friends of activist central banks such as the Fed.

A contrary view on the reliability of the Skyscraper Index was taken by a team of Rutgers University economists in an article published last December, entitled “Skyscraper Height and the Business Cycle: International Times Series Evidence,” concluding that there was no correlation between business cycles and the development of new world’s tallest buildings.

One good point that they made early in the article is that the announcement of the construction of a new world’s tallest building usually occurs several years before it is completed, and they could find no correlation between such announcements and economic downturns. (Of course, most announced "world's tallest buildings" never get built; see photo below.)

                                One "world's tallest" that never happened -- The Chicago Spire

They then tried to correlate the date of the opening of the skyscraper with the nearest economic peaks and troughs as established by the NBER and could find no correlation.

One odd flaw of this article is that it refers to “international time series evidence” but uses U.S.-centric NBER data to measure economic peaks and troughs relating to business cycles. This would not be a problem for the time period in which “world’s tallest building” was a uniquely American phenomenon, but this American dominance ended with the Sears Tower in 1974. Their comparison of the opening of the Petronas Towers in Kuala Lumpur in 1999 to the U.S. economic peak in 2001 completely forgets that the Malaysian economy peaked in 1997 and went into an economic tailspin in the Asian Contagion of 1998. The U.S. economic peak is irrelevant in this case, and this oversight is surprising considering that Lawrence's re-introduction of skyscraper index theory in 1999 was inspired by the example of the Petronas Towers and the Asian Contagion.

The authors' repeated misspelling of Mark Thornton’s name (spelled as Thorton) causes one to also wonder how closely they read his work.

Their use of months as their unit of time measurement also introduces some statistical “noise” that might possibly obscure a real pattern. If one uses years as units of measurement instead, one can almost see the forest for the trees:

 Building               Opening date  Nearest economic peak in same nation

Pulitzer                   1890             1890
Manhattan Life       1894             1893
Park Row                1899             1899
Singer                     1908             1907
Met Life                  1910             1910
Woolworth              1913             1913                                                              
40 Wall                   1930             1929
Chrysler                  1930             1929
Empire State          1931             1929
Twin Towers          1970/72        1969
Sears Tower           1973             1973
Petronas                 1999             1997* (my change)
Taipei 101               2004             2008* (my change)
Burj Khalifa              2010             2008* (my change)

There seems to be a pattern defied only by Taipei 101. Have other readers noticed this, or am I just applying false significance to the data, like an astrologer would?

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1 comment:

Real Estate said...

Yes, I agree with you that Shangai is now world's best city for skyscraper. There are lot's of real estate and most of them are qualityful also modern designed.