The Tall Building Indicator and Property Cycles

“Real Estate Will Underperform Inflation for Decades,” writes Dan Forshee. 

Most people think that real estate is a safe, reliable place to put your money. But that is just a trick of perspective. Once you have climbed to the top of a mountain, everything appears to be downhill. In fact, there could be many steep hills between you and the bottom… and long periods where you are not going down at all.

From 1915 to 1965, says Forshee, property doubled in price, but rose only about 1.32% per year. But the dollar gave way during this period, too. Housing prices didn’t keep up. So the typical house owner actually lost about a third of his purchasing power.

In real terms, the prices of 1910 went down all the way to the 1990s. Only recently did they begin to go up enough to offset inflationary losses. And only in 2005 did they regain the heights last seen early in the last century. From here, it looks as though they did nothing but rise, but in fact, property prices in the United States mostly went down for the last 100 years.

Another way to look at this is to recall Larry Summers’ warning about 1914. Liquidity and confidence were running at epic highs just before WWI. When they crashed, they crashed hard. Property in the United States did not recover for another 91 years. You can also see the long trends in real property prices simply by opening your eyes, says Forshee. The higher real property prices go, the taller the buildings property developers put up.

“Higher prices of real estate make it profitable to build tall buildings because the higher construction costs are offset by lower land costs. Most major cities in the United States had tall buildings built between 1914 and 1933 during the real estate boom of that time frame. After the tallest building was built, it typically took about 41 years for the real estate prices to return to levels that would justify buildings of similar height. Here is a data set of example cities:

Region Name of City Tallest Building Built during previous peak Year in which the record was broken. Number of years to break the previous peak
West Seattle 1914 (Smith Tower) 1969* 55
West Los Angeles 1927 1968 41
West San Francisco 1927 1965 38
Midwest Chicago 1930 1965 35
Midwest Minneapolis 1929 1973 44
Midwest Detroit 1928 1977 49
Midwest Cincinnati 1931 Not yet broken 75+
Midwest Cleveland 1930 1991 61
Midwest St. Paul 1930 1986 56
Midwest Columbus 1927 1973 46
Midwest Kansas City 1931 1980 49
East New York 1931 1970 39
East Philadelphia 1932 1974 42
East Boston 1915 1964 49
East Pittsburgh 1932 1970 38
South Dallas 1923 1943 20
South Houston 1929 1962 33
South Tulsa 1918 1966 48
Foreign Toronto 1931 1967 36
Foreign Mexico City 1956 1984 28

* The space needle is taller and was built in 1962. However, it was built as a show piece, not for economic reasons and therefore is not listed. Even if it is listed, it does not appreciably change the results. Chart courtesy of Prudent Bear

Forshee then reminds us that the “tall building indicator UNDERSTATES the time to return to a previous peak because of technological improvement in building construction.” As construction techniques improve, the cost of building up goes down. A more accurate measure of the property cycle in the United States – peak to peak – may be “closer to 60 to 120 years.”

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