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:

* 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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