Cheap Money to Build Skyscrapers Has Gone Bust

The last 30 years have seen a boom for skyscraper construction because the cost of borrowing money had declined significantly. When investors borrow money to purchase assets, they send prices higher.  The problem is that this borrowing makes the markets susceptible to busts when investors sell assets to pay their debts.  The recent financial crisis was one result of this process, with the debts larger and the price swings broader than has been seen in the past three decades.  According to central bank critics, focusing on consumers – and not on the dangers of asset-price inflation – have encouraged bubbles by keeping interest rates artificially low.

The central bank critics argue that the desire to end the credit crunch may be causing authorities to make the same mistake by maintaining short-term interest rates at less than one percent in a majority of the developed world.  Developing markets, thanks to their tendency to emulate richer nations, have the same cheap-money policies.  The irony is that many of these economies are growing faster than those in the developed world.

For the commercial real estate industry, the bubble means that it is unlikely that we will see more high-profile skyscrapers like the Burj Dubai or Petronas Towers under construction very soon.  All three projects were started during financial booms and delivered in hard economic times.

Listen to our interview with Rick Mattoon, a senior economist and economic advisor in the economic research department of the Federal Reserve Bank of Chicago, on the dangers of asset price inflation.  Click here for the podcast.