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The towers, warning of the economic crisis!

2024-11-12 18:22:09Pikëpamje SHKRUAR NGA IRENA BEQIRAJ
The towers, warning of the economic crisis!
Tirana

In 1999, Andrew Lawrence, a property analyst working at Barclays Capital wrote a paper entitled "Skyscraper Index: The Wrong Towers". The report was not published, but it argued a "general economic principle" that very tall buildings appear at the peaks of economic cycles. Otherwise, the towers are glass and steel symbols of what economist Alan Greenspan would later call "irrational exuberance."

History shows that the construction of a series of skyscrapers, buildings of record height were followed by the financial crisis. It shows not only that there is a correlation between the two events, but also that the rate of growth of a building's height can be an accurate measure of the extent of the ensuing crisis.

Of the skyscrapers that warned of the crisis, we can mention:

The world's first skyscraper, New York's 166-meter Equitable Life Building, was completed in 1873 on the eve of the five-year recession from 1873-1878.

The 187-meter-tall Singer Building and the 247-meter Metropolitan Life Insurance Company Tower were opened in New York during the Panic of 1907 in 1908 and 1909, respectively. Met Life remained the tallest building in the world until 1913.

The 443-meter-tall Empire State Building was launched in 1931, just before the Wall Street Crash of 1929. The 319-meter Chrysler Building opened to the public in 1929 as well.

The World Trade Center towers (541 m) and the Sears Tower (442 m) opened in 1973, during the 1973–1974 stock market crash and the 1973 oil crisis.

The Petronas Twin Towers, 452 m high, opened before the 1997 Asian financial crisis and held the world record for height for five years.

Burj Khalifa, 828 meters high, opened in 2008, at the height of the Great Recession of 2007-2009. Its opening was accompanied by the bankruptcy of the largest investment fund in the United Emirates.

At first glance this seems like an interesting historical coincidence and even intuitively it may seem wrong. High towers are often considered a symbol of economic and financial success, as the pinnacle of development and as the triumph of rationality. They are often seen by people as the product of sophisticated planning, financing, design and construction systems.

But the reasons why their construction can predict an economic collapse are not difficult to explain.

Since it takes a lot of capital to finance a high tower, their construction only happens in times when money is "easy" to secure, and when investors have lost their rationality, believing that paradoxically high prices will continue and the profitability will be high.

In a 1995 analysis, Carol Willis, founder, director and curator of the Skyscraper Museum in Manhattan, found that "tallest buildings generally appear immediately in the last phase of a 'boom.' Their height is proof that speculative fever and irrationality have affected both developers and their financiers" according to her, skyscrapers appear when economic growth is exhausted and the economy is before the crisis.

Albania has also entered the Skyscrapers stage. This adds to the doubts about the existence of a bubble in the real estate sector, but not only.

Although the value of all real estate in Albania is estimated at about 84 billion USD or about 3.2 times more than the GDP, (the USA has a ratio of 1.6 times), the supply continues to grow, sales are slowing down, both prices and costs of construction are increasing. While 53,000 apartments are empty, very high rents and unaffordable housing prices keep a significant part of the young population out of this market. While real disposable incomes have not increased, the increase in capital inflows that are mainly invested in construction, and the optimism that prices will continue to rise have led to an overinvestment in this sector. This economic boom of the sector is artificial and unsustainable.

The widely accepted formulas for evaluating the performance of a construction project in "normal" time no longer work. Rational behavior gives way to irrational behavior; buyers are betting on ever-increasing demand and rents and are willing to pay more than they normally would. This misallocation of capital will most likely result in a crisis in the sector, the depth of which will depend on the amount of credit, which is also growing.

Securing the status quo through the grandeur of constructions is an old approach and history has always proven it to be infallible. The vision of building a city's greatness often ends up being a reminder of arrogance, greed and impossible expectations.


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