Do rising skyscrapers indicate slowdown?

Tue, 17 Jan Pre-Open

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Skyscrapers or high rise buildings probably reflect signs of a growing economy. Occupied towering buildings speak volumes about the standard of living of the people in general, an important mark of a prospering economy. However, recently we came across news paper reports that found out a very unique correlation between rising number of skyscrapers in a country and the health of its economy. The report states that skyscraper construction boom points out an impending economic slowdown. It goes on to say that since high rise buildings are driven by cheaply available capital a sudden construction boom marks a cyclical peak of the credit cycle. And once the peak is reached cheap capital availability becomes an issue thereby triggering liquidity crisis in the future.

It has also provided anecdotal evidence to support its arguments. For instance, the Great Depression coincided with the skyscraper boom in New York. However, we find little merit to the argument of correlation between skyscraper boom and impending recession. While it is true that the increasing number of skyscrapers indicate cheap liquidity is moving into real estate, postulating that it would result in to a crisis in India is rather vague. A crisis erupts when prices turn unaffordable impacting the occupancy and resultantly the liquidity position of a developer. Further, the emergence of a crisis also depends upon how vigilant the banking system is when lending to real estate and also the home buyers.

Further, we believe that a temporary dry spell in volumes can't trigger a long standing crisis. While there have been cases in some parts of India where un-affordability is impacting the volumes considering the shortage of housing units, developers are confident that the demand would return soon. Further, it may be noted that the luxury segment has not been impacted by the price rise to that extent. And with construction cost of sky rise apartments being higher (come under the luxury segment) any subsequent loss in residential occupancy due to pricing issue is ruled out.

However, slowdown in certain sectors like IT and retail (policy issues) would mean the commercial occupancy may be slow on cards with rental yields also expected to suffer. Nonetheless, this more of a temporary thing and the demand would revive once the concerned sectors bounce back.

Lastly, as far as the anecdotal evidence of correlation between rising skyscrapers and the impending slowdown is concerned we believe that it is nothing but a spurious correlation - a type of cofrbi-relation between two variables that does not have any meaningful relationship.