The skyscraper index.

In January 1999, Andrew Lawrence, Research Director at Dresdner Kleinwort Wasserstein put forward a theory that when any country starts to build skyscrapers, recession follows soon afterwards. It starts with very low interest rates allowing companies to expand rapidly and increase employees. This requires more office space. People rush to buy property because mortgages are so cheap. Builders respond by increasing construction of new buildings. The resultant pressure on land availability forces increase in land prices. Low interest rates promote research in better technology so that builders are able to build taller buildings on the same plot of land. This is not to say that all recessions are due to property price bubbles. The recession in the 70s was due to sudden rise in oil prices, the dotcom bubble was due to " irrational exuberance " for internet companies which had yet to make any profit and the Dutch Tulip bubble of 1637 was due to a sudden craze for a humble flower. However, most asset price bubbles are due to unjustified rise in the prices of properties because people prefer investing in something tangible, properties generate rent and property prices are inflation proof. A bubble forms when people, encouraged by low interest rates, keep buying properties in spite of escalating prices believing that prices will rise even further. The real estate bubble in Japan in 1990 resulted in 2 decades of deflation, the subprime bubble in the US, leading to the fall of Lehman Brothers, nearly caused a global collapse and Britain, Ireland and Spain are in recession because of the collapse of property prices. China is struggling to bring down property prices and still maintain a high growth rate without causing inflation. In India property prices have risen by above 800% since 2002. An apartment in Delhi costing Rs 3.5 million in 2002, costs Rs 25-30 million today. In India things are made worse by the fact that half the price of any property is paid in cash or black money. Ominously the Lodha Group is building a 117 storey residential tower in Mumbai which will be the highest of its kind in the world. The RBI has reduced interest to 8% while allowing banks to pay 9.5% interest on Non Resident accounts which can flee at any time. Instead the RBI should increase interest rates in India and lower NRI rates. Non resident Indians will still invest in fixed deposits because a weak rupee and high interest rate will give them huge returns. But the RBI will be able to control the outflow of foreign currency. Property prices should be brought down by 80% which would be the fair value. This will reduce the amount of black money in circulation, allow the RBI to control money supply and inflation, make housing affordable, force businessmen to stop trying to make a fast buck in properties and focus instead on their core businesses increasing employment and growth. Will they do it? Never. Instead the government will keep increasing taxes which will reduce purchasing power and hamper growth. The World Famous Economist is an absolute dud.