Trading techniques... the skyscraper index

Last October, as part of a crackdown on “speculative” real estate projects, the Chinese authorities ordered that local cities stop building “super highrise buildings”. The ban was prompted by a number of cases where buildings had experienced problems (most notably in Shenzen, where people had to be evacuated from one skyscraper).

Yet it’s somewhat ironic because tall buildings are also typically associated with stockmarket bubbles.

While there are various versions of the “skyscraper index”, the basic logic is that skyscrapers tend to be poor investments, producing low returns. So for skyscrapers to be built, their backers need to be driven more by vanity or irrational optimism, rather than commercial logic; there needs to be a dearth of more profitable and practical investment opportunities to exploit; and, since they are usually funded with borrowed money, credit also has to be widely and easily available (a key factor associated with bubbles).

There is anecdotal evidence to support the idea that the building of record-breaking towers coincides with market crashes. Construction of the Empire State Building began a few months after the Wall Street Crash, while the original World Trade Centre in New York and the Sears Tower in Chicago were both started in the early 1970s, just before another bear market. Dubai’s Burj Khalifa (currently the largest building in the world) was still being built during the global financial crisis.

However, a study in 2015 by Bruce Mizrach, Jason Barr, and Kusum Mundra of Rutgers University, comparing construction dates for the world’s highest buildings with changes in economic output, argued that such buildings tend to follow – rather than predict – the economic cycle.