Ferrari Abandoned in Dubai as Expat Fled the Country

An amazing story, not by the facts but the scale of it: A rare $400,000 Enzo Ferrari abandoned in Dubai as British owner fled the country. Indeed, we already reported several years ago that expats were leaving the country, abandoning their flats and cars — all bought on credit, of course. Now, people start abandoning collector Ferraris! Unfortunately, there's still no end in sight, these are just a warm up for the things to come in the rest of the world.

Skyscrapers Curse — Continued

If you don't know about the Skyscrapers Curse, please read the previous posts I've written on the topic. Beyond that, I don't much more to add than the fact China and world are set for a major economic collapse of historical proportions.

Let's start with China:

Feb. 28 (Bloomberg) -- Shanghai Greenland Group said it may add more floors to China’s second-tallest building under construction to turn it into the highest in the world after the Burj Khalifa in Dubai. 

The closely held company set up in 1992 may increase the height of Greenland Center in the central city of Wuhan to 636 meters (2,086-foot) from 606 meters, said Wang Xiaodong, Greenland’s Shanghai-based spokesman. That will exceed the 632- meter Shanghai Tower also scheduled to be completed in 2014. 

China is home to 53 percent of all skyscrapers being built around the world, up from 44 percent a year earlier, Barclays Capital Research said. The country will increase the number of skyscrapers to 141, from the current 75, by 2017, according to the bank’s annual Skyscraper Index report in January. 

“The local government in Wuhan actually has a stronger intention to revise the plan, but it’s not easy for a skyscraper like this,” Wang said in a phone interview today, adding that the plan may be finalized by the end of the year. 

The Greenland Center broke ground on the project in December 2010 with a planned investment of 30 billion yuan ($4.8 billion). The development will include luxury hotels, apartments, and a conference center, it said. The building is on track to be completed in two years, Wang said, declining to say how much costs will be added with any revision to the plans. 

And then Vietnam:

Vietnam’s Skyscraper Keangnam to Drive Hanoi Rents to 5-Year Low
Feb. 28 (Bloomberg) -- Vietnam’s Keangnam Hanoi Landmark Tower, the tallest in Southeast Asia after Petronas Towers, is boosting prime office space in the capital Hanoi by half and threatening to drive rents to a five-year low. 

The property, which includes a hotel, luxury apartments and mall, is adding 100,000 square meters (1.1 million square feet) of office space, said Choi Yong-Ho, marketing manager of Keangnam Vina, the unit of South Korea’s Keangnam Enterprises Ltd. that built the 346 meters (1,135 feet) tower. 

[...]“The tower flooded the market with a lot of supply,” Fraser Wilson, Ho Chi Minh City-based director of Vietnam Property Fund at Dragon Capital, the biggest private investor in Vietnam’s stock market, said in an interview on Feb. 24. “That can only have a negative impact on the rents.” 

[...] The tower has the same height as the Center in Hong Kong and is higher than Shanghai’s Shimao International Plaza and John Hancock Center in Chicago, according to Council on Tall Buildings and Urban Habitat’s data. 

India's Skyscraper Boom Matchs China’s

We have been talking about the Skyscrapers Curve for 3 years now — see previous posts.

It's interesting to see it evolve, and see how the current credit bubble is global and how much the downturn will be painful due to the fact that these excesses are not only extreme, but are also worldwide.

The report mentions a Skyscraper Index Report from Barclays. I'd be curious to have a look at it. Wouldn't mind if one of you, dear readers, could forward that to me :-)

Here's the case of India. Bloomberg reports:

(Bloomberg) — 2012-01-12 — India, which is building the world’s second-tallest skyscraper, is catching up with China in an office building boom that may indicate that an economic slowdown is imminent, according to Barclays Capital Research.

India is scheduled to complete 14 new skyscrapers taller than 240 meters (787 feet) over the next five years from the current two, Barclays’s analysts led by Andrew Lawrence said in a report yesterday. China will increase the number of skyscrapers to 141, from the current 75, by 2017, according to the bank’s annual Skyscraper Index report.

Over the past 140 years, completion of the tallest buildings has coincided with periods of economic turmoil such as the Great Depression, the Asian financial contagion and the global credit crisis, Barclays said. China is home to 53 percent of all skyscrapers being built around the world, up from 44 percent a year earlier, according to Barclays.

“India, it seems, is playing catch-up,” the Barclays analysts, based in Hong Kong, wrote. “If history proves to be right, this building boom in China and India could simply be a reflection of a misallocation of capital, which may result in an economic correction in the next five years.”

The 720-meter India Tower will be the world’s second- tallest skyscraper when work on the building finishes, overtaking the 632-meter Shanghai Tower that is scheduled for completion in 2014, according to the Council on Tall Buildings and Urban Habitat. Dubai’s 828-meter Burj Khalifa is the world’s tallest building. 

[...] More than half of China’s skyscrapers will be built inland and away from the wealthier coastal areas and Pearl River Delta region by 2017, indicating a move toward second-tier and third- tier cities, according to the Barclays report.

China’s home prices fell for a fourth month in December after the government reiterated plans to maintain curbs that include higher down-payment and mortgage requirements, according to SouFun Holdings Ltd. Housing values dropped in 60 out of 100 cities tracked by the nation’s biggest real-estate website owner, including the 10 largest cities such as Shanghai and Beijing.

The government said last month at an annual economic planning meeting that it won’t back away from real-estate industry curbs this year that are damping home sales and pulling down prices. The nation’s financial center of Shanghai and some other Chinese cities have also said they will continue to impose the home purchase restrictions this year.

The Skyscrapers Curse Should be Complete Now — Saudi's To Build a 1,000m Skyscraper

I have been posting regularly about the Skyscrapers Curse which I find is a very valid and interesting metric of the social mood and irrational exuberance of the crowd over the past century.

So what does the Skyscrapers Curse tells us about the economy when you see all the various "new riches" compete to build the tallest ever building? In remote place away from megalopolises? Hundreds of skyscrapers are being built in Asia and the Middle East, but certainly those in the Middle East are the more worrisome as it doesn't reflect any need due to population density for example.

A few weeks after Koweit, here comes Saudi Arabia who just announced they will build the tallest building in the world, reaching 1,000 m high.

I do not expect any other skyscraper trying to beat this one for this inflation/deflation cycle... Meaning that we have already probably reached peaked exuberance for this generation, and probably the next one (people from 15 to 50 years old today).

1,000 meters, or 3,280 feet. That’s two-thirds of a mile.

When the Kingdom Tower is built on the outskirts of Jeddah, Saudi Arabia it will not only become the tallest building in the world, it will shatter the old record. The current record-holder, Dubai’s Burj Khalifa, stands at 828 meters. At least 173 meters (568 feet) taller, sight-seers on the tower’s observation deck could see how long it takes for their spit to hit the top of Burj Khalifa (this is, if they weren’t hundreds of miles apart). The tallest building in the US, Chicago’s Willis Tower, is 442 meters tall, or 527 meters if you count the antenna. The One World Trade Center tower currently being built in New York will climb, including antenna, to 541 meters.

Not merely a mine-is-bigger-than-yours jibe to their neighbors, the tower is a part of an economic initiative to strengthen Saudi Arabia’s economy by diversifying away from crude oil. For those with the means, the Kingdom Tower will be the poshest of the posh. It features a Four Seasons hotel, Four Seasons serviced apartments, luxury condominiums, top class office space and the world’s highest observatory. Total construction area is 530,000 square meters (5.7 million square feet). Adrian Smith + Gordon Gill Architecture, a Chicago-based architecture firm, won the contract for the Kingdom Tower earlier this week. Smith already has experience with designing tallest buildings in the world. He designed Burj Khalifa while at another architecture firm. The final details of Kingdom Tower’s design are yet to be worked out, but construction is to begin immediately. The total cost for the tower is approximately $1.2 billion.

Now that’s some prime real estate.

Kowait to Build the Tallest Skyscraper Yet

Since 2009, we have been describing the Skyscraper's Curse, and it's with very much interest that I discovered, thanks to my friend SS this article (dating back from 2009) on Popular Science, describing Kowait's effort to build the tallest skyscraper yet.

The Skyscraper Curse is basically this tendency for the apex of irrational exuberance in human societies to be reached when the society decides to build the tallest buildings possible.

If you follow this link, you will find a lot more about the historical occurrences, and academic studies done around the Skyscraper's Curse.

Even the worst economy in decades can’t suppress the human urge to build. Today’s most ambitious projects are bigger and wilder than ever!



Name: Burj Mubarak al Kabir
Where: Kuwait
Cost: $7.37 billion
Estimated Completion: 2016
The Challenge: Erect a 3,300-foot building that’s strong enough to withstand 150mph winds

The Empire State Building claimed the world’s-tallest title for four decades. Today’s record-holder, the more-than-2,300-foot Burj Dubai, will be lucky to keep it for four years. The Kuwaiti government is about to break ground on the City of Silk, a designed-from-scratch metropolis on the Tigris and Euphrates river delta with a 3,284-foot tower as its centerpiece. At that height, winds could sway a conventional skyscraper like a tree branch and turbulent vortices could shake it to smithereens.

So instead of building one shaky tower, London-based architect Eric Kuhne designed the Mubarak skyscraper as three interlocking towers, each twisting 45 degrees top to bottom to help stabilize it. The inside edges of the buildings meet in the center to form a triangular shaft through the middle. No matter which way the wind blows, two of the three towers will always brace the building.

Although the three-pronged design keeps the high-rise from swaying, it doesn’t counter the choppy winds that whip around the uppermost stories, which can cause damaging vibrations. So Kuhne is trying something never before done on a building: giving it vertical ailerons, the normally horizontal flaps on the trailing edge of aircraft wings that control rolling motion. The ailerons, which are only three to six feet wide, run the full length of each edge of the towers and mechanically adjust to redirect the changing winds around the structure and scatter the vortices, mitigating vibrations.

The Mubarak’s size is intended to accommodate Kuwait’s explosive population growth, with seven 30-story neighborhoods stacked atop one another, each with apartments, offices and hotels, and four-story “town squares” linking them. Even the height has a cultural significance, Kuhne says. “One thousand and one meters for [the classic Arabian fairy tale] One Thousand and One Nights. It’s the difference between bragging rights and telling a story.”

ElliottWave, the Skyscrapers Curse and China

I have been posting regularly about the Skyscrapers Curse which I find is a very valid and interesting metric of the social mood and irrational exuberance of the crowd over the past century.

In this month's ElliottWave's Financial Forecast, Steve Hochberg and Peter Kendall provide a similar analysis:

It takes a large surge in positive social mood to motivate people to erect the world’s tallest buildings. When the cooperative efforts of builders, business and government manage to literally push to the sky with the construction of a record-tall building, social mood is almost certainly at high tide. This tendency is tightly grafted to bull markets in stocks, back through at least the late 1920s, when the construction of the Empire State Building topped off the Roaring Twenties. At the outset of the more recent mania era, EWI made the connection between the epic rise in stocks and a burgeoning wave of skyscraper development, which continues to play out. In September 1996, for instance, EWT noted that expanding efforts to build the world’s tallest building are “assertions of power” and signs “of an arrivest culture.” EWT added that these buildings are often finished “after the bear market has begun.” The chart on page 249 of The Mania Chronicles shows that this is exactly how the great peak panned out. Kuala Lumpur’s Petronas Towers claimed the world’s tallest title in 1996, followed by Taiwan’s Taipe 101 and Dubai’s Burj Dubai, now known as the Burj Khalifa (after the Dubai development authority had to be bailed out). In each case, the plans for the buildings were announced as the stock market for each respective country raced toward all-time highs, and each building was completed during subsequent bear markets that are still in place.

The greatest skyscraper boom, however, belongs to China. The current tallest building in China, Shanghai World Financial Center, reached its full height in September 2007, a month before the Shanghai Composite’s peak. This is another stock market high that remains intact. Incredibly, the peaking positive mood motivated construction of the Shanghai Tower, which will become China’s tallest building at 2,074 feet high. It was started as the Shanghai Composite rallied sharply toward a countertrend high in August 2009. It will be just 700 feet short of the Burj Khalifa, still the world’s tallest skyscraper. But what the Chinese skyscraper boom may lack in record heights it makes up for in breadth. China already has six of the 15 tallest buildings in the world. By 2012, 34 of the 100 tallest buildings will be on Chinese soil. Most important, the construction of a new tallest building in China creates a giant non-confirmation with the country’s main stock average, which is still 56% below its 2007 all-time high, as the chart shows. Despite a weak stock market relative to the rest of the world, China’s still-raging skyscraper fever testifies powerfully to the unfettered optimism that surrounds its future. According to the estimate of an Australian trade specialist, for instance, China still needs “50,000 new skyscrapers over the next 15 years to cater to its expanding urbanization.” Yet, according to many other accounts, whole cities of vacant skyscrapers exist. We’ll stick with the perspective offered by the lagging Shanghai stock market, which is clearly unimpressed with all the building. The massive divergence between the Shanghai stock index and the Shanghai building boom suggests that China’s bear market, already four years old, will be one for the ages.

Emirates’ biggest developer's revenue from apartment sales drop by 81%

Dubai's property bubble was one of the fastest one to rise, and also one of the fastest one on the decline. Prices are already down more than 60% and the estimate provided by the research form of a further 25-30% seems to me to be too optimistic: expect probably another 50% drop until the real bottom is hit.

(Bloomberg — March 15) — Emaar Properties PJSC (EMAAR), the United Arab Emirates’ biggest developer by market value, said revenue from apartment sales declined 81 percent in the first quarter and from villa sales 50 percent amid weak property demand.

Income from apartment sales dropped to 375 million dirhams ($102 million) and from villas to 60 million dirhams, according to Emaar’s earnings statement posted on the Dubai Financial Market today. Overall revenue fell 31 percent to 1.98 billion dirhams in the first quarter, while profit slumped 45 percent. Emaar reported first-quarter earnings on April 24 and provided a breakdown of revenue today.

Emaar will need to "start relying more on international projects" to compensate for a decline in apartment deliveries in Dubai, said Majed Azzam, a Dubai-based analyst at AlembicHC Securities. Prices and margins are lower in international markets and Emaar’s earnings will be "hit this year, until the company resumes sales in Dubai," he said today.

The company, the developer of the world’s tallest tower in Dubai, was hurt by a more than 60 percent slump in property prices in its home market as speculative demand waned and banks tightened lending since mid-2008. Emaar’s sales in the U.A.E. contributed 79 percent of revenue in the first quarter compared with 96 percent a year earlier, according to today’s statement.
[...]
House prices in the U.A.E. may drop an additional 25 percent to 30 percent as population growth stagnates and more properties are put onto the market, according to a report by Dubai-based Rasmala Investment Bank Ltd. in March. Emaar said on May 7 it formed a team of senior managers and external consultants to develop a five-year action plan for the company.

H/T to SS for the link

London super-prime property forecast to reach incredible highs

My friend SS sent me this link, and I'll quote the most relevant bit:

Speaking at the release of Knight Frank's The Wealth Report, Liam Bailey, head of research at the property group, said that top properties in London are approaching £10,000 a square foot.

He said: "Given that top properties were selling for around £1,000 a square foot around a decade ago and that those same properties could now achieve £6,000 a square foot, it's entirely possible that we will see levels approaching £10,000 soon."

This report illustrates perfectly well the capacity of the human brain to extrapolate just a few historical points into the infinite future. In addition to that, when the human brain wants to believe into something, no matter what exogenous events happen to prove it wrong, it will still believe in it and find rationalisation in order to fool itself. Of course, something like the real estate collapse of the Japan, the US, Ireland, Dubai, etc. could never happen to the UK. Because the UK is different... or is it?

This is actually scientifically proven, and for those who still haven't read it, I highly recommend the book titled Vital Lies, Simple Truths: The Psychology of Self-Deception by Daniel Goleman.

Chinese Bubble, the Skyscraper Curse, Gold and Bubblogy

I have been talking numerous times about the Skyscraper Curse for the past couple of years, and it's interesting to see that this idea is gaining momentum and credibility. Today, Yahoo published a post that deals with China's bubble and the Skyscraper Curve:

In China, five of the world’s ten largest buildings are now under construction. Look out below!, says Vikram Mansharamani, a financial services veteran and part-time academic who has developed a multidisciplinary framework for sniffing out bubbles.v

Mansharamani is author of a new book, BoomBustology: Spotting Financial Bubbles Before they Burst. The book is based in part on a course that Mansharamani, who has two master’s degrees and a Ph.D. from the Massachusetts Institute of Technology, has taught at Yale, his alma mater. [...] Mansharamani has developed a series of lenses through which to examine market behavior. Systematically examining outbursts of mania, from Dutch investors’ infatuation with Tulips in the 1630s to Florida real estate in the 1920, can help sniff out bubbles.

If you look through Mansharamani’s lenses, it’s clear to see there’s a bubble going on in China. Tall buildings aren’t just symbolic of reckless ambition. “Skyscrapers are manifestation of easy money, overconfidence, and hubris,” he says. And they are excellent indicators of a top. “In New York in 1929 there were three buildings competing to be the world’s tallest skyscraper,” he notes. In 1997, the massive Petronas Towers in Malaysia were completed just in time for the Asian financial crisis. The Burj Dubai rose in 2007 to snatch the title of world’s tallest building – just in time for the financial crisis to his the Persian Gulf.

Beyond skyscrapers, Mansharamani notes, “China today exhibits many of the signs that have characterized many of the speculative manias throughout history.” Those include: easy money, overconfidence, and high amounts of leverage. The rise of moral hazard is another indicator. “In China, you have state-owned banks lending to state-owned enterprises to buy land from the state,” he notes. (What could go wrong?) In addition, it’s always a danger sign when economic systems begin to regard what should be outputs as inputs.

Throughout China, provincial officials are obsessed with hitting targets for GDP. Focusing on what should be an end result as an initial goal “leads people to do things that may not make economic sense.” Mansharamani cites as an example a regional leader in China who, desperate to meet a GDP target, blew up a recently constructed bridge. “He got credit for the explosives he bought, and then for the steel and cement he bought and the constructions workers he hired.”

The question for investors during bubbles is how to know when to get out. And that’s one area Mansharamani hasn’t tackled. “I do think timing is a very difficult problem in terms of identifying popping of it,” he said. “I’m not sure it’s worth shorting China at this point in time, but it is definitely prudent to avoid it.” What’s more, he notes, countries and industries throughout the world that depend in large measure on China’s rampant growth are also potentially in danger.

Using Mansharamani’s lenses, one would conclude that the current gold market exhibits plenty of bubblicious signs. He agrees, to a point. A key development in any investment mania is when it crosses over from the province of professionals to a mass phenomenon. That’s happened with gold. “Walking around the city, you see a lot of people advertising that they want to buy gold,” Mansharamani said. “Everyone is talking about gold, and that is a late stage sign.”

Another worrisome sign is the way that an investment boom tends to feed on itself through leverage and financial innovation. Example: housing prices rise because banks lend against housing collateral, and the rising value of the collateral spurs people to borrow more against their homes. A similar dynamic is happening in gold. “The gold market has had tremendous innovation, in the form of exchange traded funds (ETFs), leveraged ETFs, and everything in between,” Mansharamani notes. This innovation has, in turn, affected the price of gold. The advent of gold ETFs, he notes, “has increased the demand for physical gold.”

But there’s one important caveat. Before talking about gold, we should note that “it is an unusual asset at so many levels.” As a sort of “anti-money,” Mansharamani argues, “it is a proxy for lack of trust in responsible monetary policy.” And in recent years, there’s been something of a bubble in that as well.

Canada's Scotiabank to Sell Gold to Online Consumers in Mexico, Dubai

Just as a curiosity, and maybe also to show how much consumers are drawn into gold (never a good sign for gold, from a contrarian perspective):

(Bloomberg) Bank of Nova Scotia, which sells gold coins and bars to clients in Canada through an online store, plans to establish similar programs in countries such as Mexico and Dubai, Vice Chairman Barry Wainstein said.

“We’re looking at a number of different countries simultaneously,” Wainstein said in an interview. “In 2011, we may be up and running in one or two countries.”

Canada’s third-largest bank by assets has been expanding its ScotiaMocatta business, which trades and distributes metals such as gold and has roots that date back to 1671. The bank’s total revenue from precious-metals trading was C$245 million ($246 million) in the fiscal year that ended Oct. 31, a 53 percent increase from C$160 million two years earlier. ScotiaMocatta doesn’t disclose its financial results.

“We think we can roll out our retail product suite to a number of other countries,” said Wainstein, who is also the global head of foreign exchange and precious metals for the lender’s Scotia Capital investment-banking unit.

ScotiaMocatta opened its so-called eStore in September 2009, allowing Canadians to purchase physical gold valued at up to C$10,000 by ordering online. Clients outside of Canada, or those buying larger amounts, typically do so through wholesalers, Wainstein said.

About 60 percent of eStore users aren’t Scotiabank clients, said Wainstein, who declined to say how many customers have used the site.

The Toronto-based lender, which has operations in about 50 countries, may expand in Mexico because of ties to its Scotiabank Inverlat consumer bank.

Dubai would be a good market for expansion because of demand for gold in the Middle Eastern country, Wainstein said.

“We’re not competing in the Canadian league; we’re competing in the global league,” Wainstein said.
[...]
Scotiabank has made two acquisitions in the bullion industry since 1998, including the purchase of about $900 million in precious-metals loans from Bank of America Corp. in 2006.

Wainstein, whose bank owns gold vaults in Toronto and New York and leases space within the Bank of England’s vault in London, declined to say how much of the metal it stores.

Oil speculation far exceeds the levels reached in 2008

Below is an interesting chart published by Tiho over at TheShortSideOfLong blog. This chart shows on the right axis the number of long contracts in oil (speculative positions as reported to the CFTC). As you can see, the number of long contracts far exceeds any historical precedents, including the period were oil was trading at above $100 and reached $147. Interestingly, during that time, speculators were closing their positions, and we still ended up with a massive 70% crash. Given what we see here, a $20 baril or even lower seems more than achievable.

Here's a Bloomberg report relating the oil bullish speculations due to the events in Egypt. If you had to remember only one sentence, it would be:  You can speculate all you want, but at some point the fundamentals have to line up with the speculation.

Feb. 7 (Bloomberg) -- Hedge funds raised bullish bets on oil by the most in eight weeks on concern that political unrest in Egypt will spread and disrupt supplies from oil-producing countries in the Middle East.

The funds and other large speculators increased net-long positions, or wagers on rising prices, by 17 percent in the seven days ended Feb. 1, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the largest gain since the week ended Dec. 7.
[...]
Concern of disruptions to the Suez Canal sent North Sea Brent crude to $103.37 Feb. 3, the highest intraday level since Sept. 26, 2008. Brent for March settlement fell $1.93, or 1.9 percent, to $99.83 on the London-based ICE Futures Europe exchange on Feb. 4

About 2.5 percent of global oil output moves through Egypt via the Suez Canal and the Suez-Mediterranean Pipeline, according to Goldman Sachs Group Inc. The waterway was open and operating normally on Feb. 4, Ahmed El Manakhly, head of traffic for the Suez Canal Authority, said by phone.

Oil may drop unless transport through the canal is disrupted, said Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania.

“We’re not seeing a decline in traffic,” Khan said. “You can speculate all you want, but at some point the fundamentals have to line up with the speculation.”

Persian Gulf shares gained yesterday, sending Dubai’s index to a week high, as Egypt’s government met with opposition leaders to quell protests, stoking speculation the turmoil in the country may ease. Qatar’s stocks advanced.

Net-long positions in oil held by managed money, including hedge funds, commodity pools and commodity-trading advisers, increased 29,928 futures and options combined to 201,941, according to the CFTC report.
[...]

Academic Research about the Skyscraper Curse

I have already mentioned the Skyscraper Curse about Dubai in early 2009 and London in late 2010 and so I started investigating and looking for more info about this idea as I found it particularly clever and relevant, the most important I will share below with you:

It all got started in Jan 1999 by Andrew Lawrence, a research director at Dresdner Kleinwort Wasserstein who came up with the idea of the Skyscraper Index and its correlation with economic downturns:

The Skyscraper Index is a concept put forward in January 1999 by Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein, which showed that the world's tallest buildings have risen on the eve of economic downturns. Business cycles and skyscraper construction correlate in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready for recession. (Skyscraper Index on Wikipedia)

I was amazed and surprised to find that Austrian Economist Mark Thornton has actually been studying the relations between the construction of record setting skyscrapers and economic cycles.

Mark Thornton has published two papers both available on the Mises Institute web site. Here are the links to the first and the second.

Here is the abstract of first paper:

The construction of skyscrapers that qualify as the “World’s Tallest Building” tends to coincide with major downturns in the economy. The Skyscraper Index, created by economist Andrew Lawrence shows a high level of correlation between skyscraper construction and the business cycle. Is this just a coincidence, or perhaps do skyscrapers cause business cycles? A theoretical foundation of “Cantillon Effects” for the skyscraper index is provided here showing how the basic components of skyscraper construction such as technology are related to key theoretical concepts in economics such as the structure of production. The findings, empirical and theoretical, suggest that the business cycle theory of the Austrian school of economics has much to contribute to our understanding of business cycles, particularly severe ones.

For those lazier among us, he has given numerous very interesting presentations about the historical and economics facts that lead to his conclusions. Embedded below is a 30 min must see session, presented at "Our Enemy, Inflation," the Mises Circle in Houstonon Saturday, 24 January 2009.

Below are a few more useful YouTube links, and I am not embedding in order to avoid an oversized post:

• Skyscrapers and the Housing Crisis [Mark Thornton] Presented at the Ludwig von Mises Institute's 2009 Mises University held in Auburn, Alabama. (50 min)
  
• Skyscrapers and the Housing Crisis | Mark Thornton Lecture presented by Mark Thornton at the Ludwig von Mises Institute's 2010 Mises University conference, the world's leading instructional program in the Austrian School of economics.
  
• Skyscrapers and Economic Cycles: An Interview with Mark Thornton (The Lew Rockwell Show #25)
  

Update

This is a personal update: I've been traveling quite a bit lately, and will continue to do so during the next several weeks, spending time between London, Paris, Singapore, New York and maybe Dubai. So apologies in advance if you experience disruption in your reading habits. I will do my best to keep on posting regularly.

Dubai property prices decline steadily, as predicted

As predicted in my previous posts and by previous reports, Dubai property prices are still collapsing, and the rate of the collapse is increasing. Note that the declines mentioned here are from the previous quarter, not from the previous year (which is the normal way of reporting).

Jan. 9 (Bloomberg) -- Home prices in Dubai, the property market that had the biggest reversal because of the financial crisis, fell as much as 5.1 percent in the fourth quarter from the previous three months and more declines are “unavoidable,” Cluttons LLP said.

Cluttons, a London-based property broker, said villa prices dropped 5.1 percent, while apartment values declined 2.4 percent in the fourth quarter from the third. The broker expects 35,000 homes to be completed in Dubai over the next two years. Property prices in the emirate slid by almost 60 percent from their peak in mid-2008 after the credit crisis squeezed speculators out of the market and forced banks to lend less, Ahmed Badr, analyst at Credit Suisse Group AG said today.

“As supply continues to increase, drops in values will be unavoidable,” Cluttons said. “We are continuing to see the flight to quality in both the sales and rental markets as the more desirable locations become increasingly affordable.”

Most homebuyers have budgets of no more than 1.5 million dirhams ($410,000) and only about 6 percent of them would consider properties costing more than that, the broker said. Rents of apartments fell 3.3 percent in the fourth quarter, while villa rents declined 3.2 percent from the previous quarter, Cluttons said.
[...]
Office rents fell in the fourth quarter as new buildings added to the amount of empty space. Dubai had 2.6 million square meters (28 million square feet) of offices under construction in June, the third-highest amount after Shanghai and Moscow, Colliers International said in a report in October.

Owners of office space in Dubai are becoming increasingly flexible, offering incentives to attract tenants. They include reduced rents and regular payment terms as well as rent-free periods and longer leases. Some landlords are even offering to pay brokers on behalf of tenants, Cluttons said.

Dubai Property Prices Will Continue to Fall for Many Years

I have been posting about Dubai for the past year, and so far, my forecasts have been quite accurate.

For about a couple years, I have been writing that Dubai was on the brink of collapse and mentioned the The Skyscraper Curse which I find to be very compelling.

Just a month ago, I wrote a post titled Some of Dubai's Office Buildings Will Be Empty Forever concluding that I wouldn't be surprised to see another 30 to 50% decline from here, in Dubai.

Here are some quotes from a Bloomberg report, giving more up to date information about the state of collapse in Dubai.

Dec. 15 (Bloomberg) -- Dubai property prices may drop for the next two years, extending a decline in the Persian Gulf sheikhdom that’s already cut values by more than 60 percent since the 2008 peak.

Residential values may fall as much as 20 percent more by the end of 2012 if new homes are built as planned, according to broker Landmark Advisory in Dubai. Cluttons LLP, a London-based property consultant, and Jones Lang LaSalle Inc., the second- largest publicly traded commercial property broker, also forecast further declines.

About 48,000 homes will come on to the market in the next two years, or about 12 percent of existing supply, according to Jesse Downs, director of research at Landmark. An influx of foreign buyers sparked a construction boom as prices rose by 79 percent to mid-2008 from 2007 before the financial crisis caused lenders to tighten credit and speculators left the market.

12 percent is quite a big number. I'd be curious to find out what's the current vacancy rate on existing properties.

“There is still no parity between supply and demand,” said Paul Richard, associate director at Cluttons in Dubai, which estimates that 35,000 homes will be completed through 2012. “You’re looking at a good two years” for Dubai’s market to reach bottom, he said.

[...] Home prices fell 6 percent in the quarter from the previous three months, Colliers International said on Nov. 7.

Almost half of Dubai’s planned real estate projects, from offices to villas, were canceled as buyers defaulted and access to funding became harder. Residents who lost their jobs had to leave the country within 30 days, causing many to abandon their cars and mortgages.

Well, that's actually a good news. It means that less money and resources are going to be wasted.

Emaar Chairman Mohamed Alabbar said last month that Dubai’s market has bottomed out “without a doubt,” and “not much” new housing supply is coming on the market.

Predictions of an end to the slump have proven overly optimistic in the past. In May 2009, Markus Giebel, then the chief executive officer of Deyaar, said the property market would bottom out that year. In the same month, Landmark Advisory said home values may stop sliding in the fourth quarter of 2009.

Economists are always making over optimistic predictions. No surprises here. But of course, no one is going to question the predictions of growth in the US and the rest of Europe, or profits and equity increases, etc.

“Without an influx of demand from outside the country, forget about it,” Cluttons’s Richard said. He estimates that home prices will drop 5 percent to 10 percent by next summer.

Attracting foreigners became more challenging after the government changed residency rules last year. From 2002, property ownership qualified the buyer for a five-year residency visa that was easily renewed. That changed in May 2009, when new United Arab Emirates regulations cut the length of residency visas to six months and required holders to leave the country and return for renewals, paying 2,000 dirhams ($546) per visa each time.

That was a very "clever" move indeed. I never understood why people would ever want to live in Dubai, except for making a lot of cash for a few years. But now, with a 6 month visa and more than $500 to renew it, it's become a hassle. Basically, they don't want to create an income tax, so they've came up with this hidden "residency tax" of $1000 per annum. Add admin and bureaucracy on top...

“The visa rules have been highly damaging and definitely shattered people’s confidence,” said Ludmila Yamalova, a partner at law firm HPL Yamalova & Plewka JLT. “Many bought property just because that would enable them to live here. They had their five-year residency and built their lives around it. Now they don’t have that security.”

Well, it was very clever to take a 25 or 30 year mortgage to get a 5 year residency in the first place. Things change, specially governmental promises: they never keep up their words.

[...] Downs predicts home prices will drop 15 percent to 20 percent by 2012 if the most residential buildings currently under construction go onto the market as scheduled.

“If the pipeline is delayed, that will only prolong the cycle,” she said. Properties won’t see renewed demand “until prices come down further and buyers have greater certainty over long-term rent yields.”

Some of Dubai's Office Buildings Will Be Empty Forever

Quite an interesting statement, coming from the CRBE: "Dubai’s Worst Office Buildings Will Be Empty Forever". Yet another Bubble-Economy has collapsed, but markets have still not priced and when they do, bad things will happen to the currencies of the region, the CDS traders, and all the debt holders — because of course, even if the building stay empty until the end of time, some paid for them to be built, and that money has been spent.

Oct. 14 (Bloomberg) -- Some Dubai office buildings are so ill-conceived and poorly located that they will never be occupied, while others may command no more than the cost of maintenance, according to CB Richard Ellis Group Inc.

“Some buildings will be permanently vacant and will never be let because they are wrongly located, they are of poor quality or have the wrong legal structure in place,” Nicholas Maclean, Middle East managing director for the U.S. property broker, said in an interview.

Speculation fueled Dubai’s property market after foreigners were allowed to buy real estate in parts of the emirate in 2002. Buyers with no experience in property management flocked to purchase floors in planned office buildings before any work started, resulting in poorly finished towers in inconvenient locations with multiple owners, Maclean said.

My question is: wasn't this the case in almost every country? The US, Canada, Australia, the UK, most of Europe excluding Germany, etc.?

Such places have to compete for tenants in a Dubai market with an overall vacancy rate of 40 percent, with newly developed areas on the outskirts hit the hardest. At least 20 million square feet (1.85 million square meters) of space, about 40 percent of Dubai’s existing office supply, will be added in the next four years, CBRE estimates. That will put further pressure on prices that slumped by 60 percent on average since the peak in mid-2008.

60% drop in 2 years. That's an impressive world record, I would say! And you still have 40% vacancy rate...

“The further you are away from Sheikh Zayed Road, the less desirable the location and therefore the quicker rents fall,” Maclean said, referring to the main business thoroughfare near Dubai’s coast. “Why would you go there when you can get accommodation for a relatively low price closer to town?”

Landlords are providing incentives such as rent-free periods of as long as 12 months on seven-year leases and fitting-out allowances to attract tenants, Jones Lang LaSalle said in a report earlier this month.
[...]
Dubai had 2.6 million square meters of offices under construction as of June, the third most in the world after Shanghai and Moscow, Colliers International said in a report this month.
[...]
The Dubai Financial Market Real Estate Index [...] has fallen 85 percent from a record high in September 2005.

85% drop in 5 years... That's what we're going to see everywhere in Bubble Economies, including China and the UK, and yes, including Australia and Canada. Unfortunately, 85% is not the end, and prices will decline a lot more. I wouldn't be surprised to see another 30 to 50% decline from here, in Dubai, given the facts mentioned in this report.

European market's rally 10% after the European TARP is announced: It's déjà-vu!

Flashback on the 13th of October 2008:

Oct. 13 (Bloomberg) -- U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars.

The Standard &Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance, its steepest since 1939, and the Dow Jones Industrial Average climbed more than 936 points.

What happened then? The 14th of October the markets went slightly down. The 15th of October, the markets dropped about 10% and give back all the gains from the 13th of October.

Flashback on the 1st of December 2009, when Dubai World was defaulting on its interest repayments, I wrote:

[A] note to all those that think that "markets overreacted" and that "Dubai World's liabilities are so small": the problem is not in my opinion that the liabilities are small or not. It's rather that it just confirms to those who thought the worst is over that they couldn't be further from the truth. It's now time for the sovereigns to default.

Now, back in 2010, Sunday the 9th of May, the ECB and the UE announce a $1 trillion bailout plan for the sovereign countries. By doing so, the ECB acts illegally. So was Hank Paulson in 2008. It doesn't prevent them from doing it...

Monday the 10th of May, the European markets soar by 8 to 12%.

Tuesday the 11th of May, the European markets drop slightly 1-2%.

Does it mean tomorrow we'll have a repeat of what happened in the US?? And a massive 8-9% drop? Or will we have to wait a few more days/weeks to get it?

Wait&Pray.

James Chanos: "We're not saying China will imminently crash but..."

James Chanos presentation has been uploaded on YouTube, which is great news for us. We get access to the real source instead of people reporting (and voluntarily or involuntarily modifying it).

If you want to learn about China, you have to watch this great presentation (about an hour worth of footage). It debunks a lot of ideas about capitalist China and how the economy and people are doing there along with teaching some valuable investment lessons.

Below is yet another report on Bloomberg about China and Chanos:

Feb. 22 (Bloomberg) -- [...] Huaxi is also emblematic of the country’s construction and real estate boom. Communist Party officials there are building one of the world’s 30 tallest buildings, a 2.5 billion yuan, 328-meter (1,076-foot) tower. The revolving restaurant atop the so-called New Village in the Sky offers sweeping views of paddy fields, fish ponds and orchards, Bloomberg Markets reports in its April issue.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”

Huaxi has an even more ambitious project coming up: a 6 billion yuan, 538-meter skyscraper that would today rank as the world’s second tallest. The only loftier building is the new Burj Khalifa in Dubai.

Such undertakings figured in warnings hedge fund manager Jim Chanos delivered in January that China is Dubai times a thousand. The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”

China has defied the global recession of the past two years and remained the fastest-growing major economy. Gross domestic product soared 10.7 percent in the fourth quarter. The government has provided 4 trillion yuan in stimulus spending and encouraged banks to lend a record 9.59 trillion yuan last year, trying to bridge the gap until demand for exports rebounds or domestic consumption takes off.
[...]
Instead of concentrating on their core businesses, giant state-owned enterprises, or SOEs, have bet on real estate, according to Zhang Xin, a former Goldman Sachs Group Inc. analyst who’s chief executive officer of Soho China Ltd., the biggest property developer in Beijing’s central business district. “All the SOEs are bidding the prices up to the sky,” Zhang told China International Business, a magazine backed by China’s Ministry of Commerce, in December. That’s despite office vacancies in China’s capital being at record highs, according to Boston-based commercial real estate company Colliers International.
[...]
Local-government officials have wasted stimulus funds by replacing infrastructure that was fine in the first place. State media complained in May 2009 that party chiefs in Jianyang, Sichuan province, decided to help boost the local economy by rebuilding a bridge that was in such good condition it had emerged unscathed a year earlier from the earthquake that killed 70,000 people. The so-called Bridge of Strength withstood a demolition crew that tried to blast it to pieces with dynamite, the official China Daily reported.
[...]
Still, even Mobius says investors have to be wary. He got rid of an investment in a Chinese food company after discovering that it was using funds to buy apartments instead of to process soybeans.

Overcapacity in China

Yet another great report about China's economic crash ahead. The bit that worry me a lot is that more than 60 percent of investors surveyed by Bloomberg on Jan. 19 said they viewed China as a bubble. As a contrarian play, it looks like I might be wrong, since I'm agreeing with 60% of the investors.

Feb. 12 (Bloomberg) -- Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates.

“I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009.

Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($965 million) 74- story China World Tower 3.

Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble.

“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best.” [...]

A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.

More than 60 percent of investors surveyed by Bloomberg on Jan. 19 said they viewed China as a bubble, and three in 10 said it posed the greatest downside risk. The quarterly poll interviewed a random sample of 873 Bloomberg subscribers and had a margin of error of 3.3 percentage points.

Digesting the debt from a popped property bubble may slash bank lending and drag growth lower for years in an economy that Nomura Holdings Inc., Japan’s biggest brokerage, says will provide more than a third of world growth in 2010.

The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can’t be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University, ranked China’s top university by the Times newspaper in London. [...]

“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land -- not even desirable plots of land -- in Beijing to astronomical rates,” Chovanec said. “At the same time you have 30 percent-plus vacancy rates and slumping rents in commercial property so it’s just a case of when you recognize the losses -- or don’t.”

China’s lending surged to 1.39 trillion yuan in January, more than in the previous three months combined. Property prices in 70 cities climbed 9.5 percent from a year earlier, the most in 21 months.[...]

Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be “Dubai times 100 or 1,000.” Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt. The economy may shrink 0.4 percent this year, Shuaa Capital, the biggest U.A.E. investment bank, says.

The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas -- the 160-story Dubai skyscraper that’s the world’s tallest.

[...]  CB Richard Ellis doesn’t count empty office buildings bought by banks and insurance companies when calculating vacancy rates, since some of the space is for the owners’ use. The Los Angeles-based company said in a report that vacancy rates are starting to fall and rents to rise for the best office buildings as China’s fast economic growth buoys demand.

[...] “In many cases when you look at these buildings and say, that’s never going to be fully occupied, somehow 12 to 18 months later the building is full,” said Chris Brooke, CB Richard Ellis’s Beijing-based president and chief executive officer for Asia.

Overcapacity may be looming in manufacturing as well. China’s investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia’s gross domestic product. Excess steel capacity may have reached about 132 million tons in 2009, more than the 87.5 million tons from Japan, the world’s second-biggest producer. The Beijing- based EU Chamber of Commerce report said a “looming deluge” of extra cement capacity is being built.

[...] “A lot of people will lose a lot of money, but the banks will probably not go down like in the 1990s,” Xie said in a phone interview. “Of course there will be a lot of bad debts. There will be a lot of mortgages gone bad I think.”

[...] “China is the only place in the world that despite having more empty buildings than the rest of the world has yet to reflect those valuations on their balance sheet,” Rodman said.

[...] The supply of office buildings will continue to grow. Jones Lang LaSalle Inc., a Chicago-based real-estate company, estimates that about 1.2 million square meters (12.9 million square feet) of office space in Beijing will come on line this year, adding to the total stock of 9.2 million square meters.

The city government is driving growth regardless of the market. [...] Across town, the district government is seeking to double the size of the city’s Central Business District, which already has the highest vacancy rate ever recorded in Beijing. It was 35 percent at the end of 2009, according to Jones Lang LaSalle.

AlJazeera report about this 1-million residents city completely empty (fast forward to about 1min20):

The world's largest shopping mall, in Guangzhou, China built in 2005 that now sits almost entirely empty (IPTV link, requires you to be located in the US).

Greece, Latvia, Lithuania on the verge of default

Dec. 8 (Bloomberg) Fitch Ratings cut Greece one step to BBB+ today, the third- lowest investment grade. S&P put Greece’s A- rating on watch for a possible downgrade yesterday, signaling it may be reduced within two months.

I wrote, on the 1st of December 2009:

Second, a note to all those that think that "markets overreacted" and that "Dubai World's liabilities are so small": the problem is not in my opinion that the liabilities are small or not. It's rather that it just confirms to those who thought the worst is over that they couldn't be further from the truth. It's now time for the sovereigns to default. That's what is scary and dangerous, not the tiny $60 billion of liabilities that Dubai World is defaulting on.

Today, Mish writes:

Many think the market reaction to the Dubai default was way overdone. I prefer to think of it as a huge warning shot.
[...]
According to Fitch, Baltic Ratings Remain Under ‘Downward Pressure’
Fitch Ratings said Latvia and Lithuania’s sovereign ratings remain under “downward pressure” as the Baltic states’ economic plight sends their deficit and debt levels higher.

Even though the markets are still showing irrational exuberance, these news are all very bullish for gold (which is declining quite violently from a very overbought position) and bearish for stocks in general and any bond other than US Treasuries and German Bunds. Also bearish for the EUR, bullish USD.