'The Skyscraper Index' -

It would be very difficult to find a man from the modern world who does not know about Burj Dubai. At 2,684 feet, it is the tallest man made structure ever built. And until most recently, it was a statement showcasing the giant strides that Emirate kingdom of Dubai had taken in affirming itself as one of the most popular destinations in the world. But henceforth, Burj Dubai is also going to be remembered for something else. It will be remembered for validating once again, an economic theory called as 'The Skyscraper Index'. Created by the economist Andrew Lawrence, the theory states that the building of world's tallest building may be a useful way to predict the onset of a major economic downturn. It was in October 2009, Emaar, the construction company that was constructing Burj Dubai announced that it had completed the exterior of the building and within two months, the Dubai government has come very close to defaulting on its loans.

Equitymaster has found out that this is not an isolated case. As shown in the table below, there seems to be a strong correlation between construction of landmark buildings and the occurrence of a financial crisis.

Skyscrapers & economic crisis: Is there a link? It definitely appears so
Year Skyscrapers Height Economic crisis
1907 Singer Building 612 ft US banking panic
1931 Empire State Building 1,250 ft The Depression
1973 Sears Tower, Chicago 1,450 ft Oil crisis
1998 Petronas Tower, Malaysia 1,483 ft Asian crisis
2009 The Burj, Dubai 2,684 ft Subprime crisis?
(Source: Equitymaster research)

And whats the reason behind such happening, or what underpins the theory? Possibly construction of tall buildings is a long gestation and a capital intensive project and the most favorable time for it to start is during a time when there is low interest and strong liquidity. Therefore, asthe building gets completed, the loose policies have lived their lives and the markets ready for a correction, leading to the completion of construction coinciding with a slowdown. Like all economic theories, this one may also not be a foolproof one, but can definitely used as an important tool towards assessing the health of the economy.