You may have missed the news that an obscure government bureau recently introduced limits to new building heights in April – a regulation almost certainly related to what economists call the ‘Curse of the Skyscraper.’
While the ‘Curse of the Skyscraper’ might sound like a B-movie horror flick, it is backed by economic theory. Believers in the Curse use skyscraper projects as a proxy for what Nobel-prize-winning economist, Robert Shiller, labeled “irrational exuberance.” The theory suggests that economic busts are driven by policy: as governments provide easy credit to spur economic growth, the sudden influx of cash fuels poor-performing projects that cost more than they create value.
Building projects can offer the chance for stellar investment opportunities in areas with expensive land prices. But, the skyscrapers that the theory refers to can reach twice the height of the other buildings in the area. When a project’s primary goal is to tower over its surroundings, investors should be suspicious that the developer may value prestige over profit.
At a certain point when constructing a skyscraper – and this point varies depending on a variety of factors, including land value and construction technology – adding another floor becomes exponentially more expensive and unprofitable. According to the theory, skyscrapers, particularly those attempting to be the tallest in a particular category (tallest building in China, for example) are often conceived during a time of economic irrational exuberance and, frequently, just before a bubble bursts.
A Marker for Recession
The Curse has a lot of history to back it up. The Empire State Building was conceived in the late 1920s, just before the Great Depression. For the first decade of its existence, New Yorkers jokingly called the building the “Empty State Building” because it had so few tenants. The Petronas Towers, the twin Malaysian buildings that briefly held the title of tallest buildings in the world, were conceived, constructed and opened in the run-up to the Asian Financial Crisis in the late 1990s, when Malaysia and several other southeast Asian countries were at the center of a global economic crisis. Dubai’s Burj Khalifa became the world’s tallest building in 2009, just after the Great Recession. All three skyscrapers were at one time the tallest structures in the world, and all three were conceived in an environment where policy-abetted economic recklessness soon contributed to financial collapse.
The theory of the Curse of the Skyscraper was developed in 1999 by Andrew Lawrence. The investment banker developed a Skyscraper Index to measure the growth of skyscrapers, and track how they mapped against busts. Ever since, economists have debated the idea. In 2015, The Economist suggested that the Curse was probably imaginary, while in 2018, ”The Skyscraper Curse” by Mark Thorton, an economist at the Mises Institute, argued that the Curse “has correctly forecast all major economic crises for over a century.”
Avoiding the Curse: Chinese Superstition
Although they rarely discuss it in public, Chinese officials are frightened by the Curse – and the regulation was almost certainly in response to this fear. There is precedent: the Wuhan Greenland Center was supposed to be approximately 2,100 feet (636 meters), but in 2018 it was cut down to 500 meters to satisfy bureaucrats’ desires. Suzhou was originally planning on building a 2,390 foot (729 meter) skyscraper, but that too was shut down by red tape. Similar cancellations of tall building projects happened in Chengdu and Shenyang. Currently, about seventy buildings above the height of 656 feet (200 meters) are on hold. The government has also previously discussed how it hopes to avoid the Curse.
There are 1,628 buildings in the world taller than 656 feet (200 meters). 759 belong to China, with most of the country’s skyscrapers have been built over the past 10 years. The concern expressed by economists like Mark Thorton and George Magnus is that China’s skyscraper boom has not been driven by economic logic tied to the country’s rapid urbanization, rather by prestige projects birthed by entrepreneurs or local bureaucrats that hope a skyscraper will cement their legacy or lift them to higher office.
The best example of this is Tianjin’s Goldin Finance 117 building, built by Pan Sutong. Tianjin is a second-tier city in the shadows of Beijing. In the center of Tianjin, near the building site, no nearby building is even half as tall as the Goldin Finance 117, suggesting that this building’s construction was driven by something other than property prices. Pan’s wealth came from electronics, but for more than a decade, he has mostly invested in high-profile projects. He loves wine and polo, and is the 365th richest person in the world with a net worth near US$4.9 billion. The Goldin Finance 117 was intended to have 117 stories, topping out at 597 meters (1,958 feet) with an 890,000 square foot polo club and 64 mansions inside.
The construction of Goldin Finance 117 began in 2007, but stalled in 2010 because of the Great Recession. Construction restarted in earnest in 2011, but then re-paused in 2016. Just as China’s stock market crashed, Goldin Finance 117 ran short of funding and, after topping out, construction on the building ended – making it the world’s tallest abandoned building. To this day, one of the tallest skyscrapers in the world remains unfinished and unoccupied. It serves as both a monument to the hubris of Pan Sutong and a clear sign that the Curse is at work.
Goldin Finance 117 is hardly the only white elephant skyscraper in China. In 2013, The Broad Group, a Chinese company based in Hunan, decided to build a 2,749 foot (838 meter) building that was to be 10 meters higher than Dubai’s Burj Khalifa. The builders repeatedly assured the media that the permits were on their way as they prepared for construction. But the government, apparently concerned about the Curse, had no intention of issuing any permits. The Broad Group decided to move ahead with a ground-breaking ceremony, despite lacking governmental approval. Four days later, bureaucrats halted construction citing The Broad Group’s lack of proper permits.
A Metaphor for Real Issues
The Curse of the Skyscraper points a larger issue in the Chinese economy. Because the government restricts the outflow of money from China, Chinese savers have few options besides parking their money in banks. Banks then use their massive cash stores to offer cheap loans to politically-connected developers, driving a building boom and launching unprofitable projects.
Approximately 16.4% of China’s GDP was attributed to real estate in 2017, a figure that some economists find worrying. The central government has a tendency to encourage infrastructure spending as a boost to GDP – particularly in times of economic turmoil. But, these projects are infamous for rarely turning a profit. Just like so many domestic construction projects, Goldin Finance 117 had a volatile stop-and-go building process. The fact that it still remains one of the tallest buildings in the world while completely void of tenants points to a more systemic pattern of financing poor-performing projects through cheap credit and flawed policy.
So the next time you consider investing in Chinese markets, just remember – there is no need to look out for a bust. Just look up.