In and Around Indiranagar, Bangalore

Why is Infosys buying so much land?

2006-07-26T09:21:00.000-07:00

Why is Infosys buying so much land?

http://inhome.rediff.com/money/2006/jul/25infy.htm

July 25, 2006

Ten thousand employees work in the twin buildings for Bell South in America. More than 5,000 work in a single office complex for AT&T. Then why does Infosys need thousands of acres of land? If Wipro and IBM can work out of rented offices in Bangalore, why can't Infosys?' writes an angry blogger about Infosys.

It is not just bloggers, many people in Bangalore say they fail to understand why the software giant is acquiring land not just in Bangalore, but all over India.
Infosys is today said to be the largest owner of land among IT companies in India, and not everyone is happy about this. Last year, former prime minister H D Deve Gowda took on Infosys, levelling charges of 'land grabbing', accusing the company of doing little for Bangalore's growth as an IT hub.

So why does Infosys need so much land?

Officially, Infosys says the company believes in building its own facilities to enhance productivity and maintain a young, collegial culture for the organisation.
Infosys' global headquarters and campus at the Electronics City, Bangalore, is the world's single largest software development facility among IT services companies. The company has large campuses and facilities at various development centres in India.

These centres are equipped with the latest technology and solutions for enterprise networking, office productivity, collaborative software engineering, and distributed project management. They also include facilities for ongoing education, fitness, sports, and multi-cuisine cafeterias.
How many acres of land does Infosys own?

The company declined to reveal the figure, saying it is "in the silent period before the quarter results."

But rough estimates -- provided by sources at Bangalore-based builder Sobha Developers, the real development firm that is in charge of executing Infosys campuses -- indicates that the company owns around 4,000 acres of land across India, where it has built, and is continuing to build, huge campuses.

"Is Infosys a real estate company or an IT firm? I fail to understand why they are greedy for land," says agitated social activist K Krishna Raghav, who supported an agitation by farmers who protested against the Karnataka government's decision to give land to Infosys reportedly at a throwaway price in Bellandur, a village on the outskirts of Bangalore.
"Why does Infosys need lots of land? Why do they need a golf course at their campus when people do not have living space in Bangalore?" asks Raghav.

Two years ago, Infosys came under attack from villagers in Bellandur who alleged that the IT major was buying wetland at rates much lower than prevailing market rates.
According to the villagers, the price of land in the Bellandur area ranged from Rs 40 lakh (Rs 4 million) to Rs 1.5 crore (Rs 15 million) in 2003. But the Karnataka Industrial Areas Development Board agreed to sell 100 acres to Infosys at a uniform rate of Rs 9 lakh (Rs 900,000) per acre.

In Bangalore, Infosys owns around 1,000 acres of land. The company employs nearly 25,000 people in itsBangalore development centres.

"Does Infosys need to provide more than 1,500 square feet of office space per employee?" asks Reghu Kumar, a Janata Dal-Secular politician in Bellandur. "They have built a golf course on their campus while people do not have any place to sleep in the city," said Kumar, whose party, the JD-S, rules Karnataka in alliance with the Bharatiya Janata Party.

The second largest Infosys campus, after Bangalore, will be in Hyderabad. The company is building a huge campus in the city spread over 550 acres of land. Infosys already has a campus over 50 acres in Hyderabad. Early this year, the Andhra Pradesh government sold 550 acres of land to Infosys at Rs 12 lakh (Rs 1.2 million) per acre: a low price in booming Hyderabad.
Infosys officials say the company is acquiring so much land because it is strapped for space. The company these days is building an additional space of 31,76,400 square feet at various development centres across India.

So where, in India, is Infosys building space?

Bangalore: The Electronic City is the company's global headquarters. It is the world's single largest software development facility among IT services companies.

Two software development blocks of 426,000 sq ft with 4,130 seats and a Multimedia Centre of 26,000 sq ft with 110 seats have already been completed at the Bangalore centre.
In addition, a software development block of 196,000 sq ft with 2,500 seats, a food court of 61,000 sq ft, an employee care centre of 264,000 sq ft and a multi-level car park of 310,000 sq ft are under construction. The existing capacity at the Infosys Bangalore campus comprises 20,84,836 sq ft with 14,465 seats.

Pune: Last year, two software development blocks of 250,000 sq ft, with 2,400 seats, were completed in Pune. A food court of 50,000 sq ft and two software development blocks of 374,000 sq ft with 3,000 seats, are under construction.
Together, the Infosys campuses in Pune have a built-up area of 848,647 sq ft. with 5,931 seats.

Bhubaneswar: A software development block of 95,000 sq ft, with 800 seats, and an employee care centre of 100,000 sq ft, have already been completed. Currently, a software development block of 139,000 sq ft, with 1,300 seats, is under construction.
The campus has a built-up area of 384,000 sq ft with 2,000 seats.

Chennai: An employee care centre of 75,000 sq ft has been completed. Currently, the campus has a built-up area of 496,317 sq ft with 2,976 seats. For the second campus in Chennai, work is under construction for two software development blocks of 250,000 sq ft, with 2,400 seats and a food court of 50,000 sq ft.

Hyderabad: A software development block of 154,000 sq ft of 1,100 seats has been completed. Civil works are in progress for the Enterprise Solutions University, including employee care facilities, of 300,000 sq ft. Currently, the campus has a built-up area of 616,000 sq ft with 3,965 seats.

Mysore: The 441,000 sq ft Global Education Centre, capable of training 4,500 professionals at a time, an employee care centre of 110,000 sq ft, 2,350 residential rooms of 110,000 sq ft and a food court of 36,000 sq ft, have been completed.

Two software development blocks of 420,000 sq ft, with 4,200 seats, 258 residential rooms of 141,900 sq ft, a food court of 39,000 sq ft and a multiplex building of 56,000 sq ft are under completion. Currently, the campus has a built-up area of 2,206,630 sq ft with 1,734 seats and can train and house 4,500 employees.

Mangalore: Infosys is buying 25 acres of land in Mangalore for expanding. Plans to invest Rs 300 crore (Rs 3 billion) in the Mangalore centre, which has topped in customer satisfaction and employee satisfaction among other Infosys centres.

The Mangalore centre, which celebrated its 10th anniversary, recently has grown from 20 employees in 1995 to more than 1,600 employees currently, servicing over 42 clients across the
United States, Europe and the Asia-Pacific region.

Chandigarh: Work is in progress for a software development block of 330,000 sq ft with 3,100 seats, a food court, a health club and employee care centre of 1,74,500 sq ft.

Thiruvananthapuram: Interiors have been completed in the leased space of 22,000 sq ft, with 220 seats. Infosys has acquired 50 acres of land to build its own facility in Thiruvananthapuram.

Bubble Over Troubled Waters

2006-07-23T03:54:00.000-07:00

Why the real estate bubble could be good news for the economy.
By Daniel Gross

Everyone's talking about the incipient bubble in housing and real estate like it's a bad thing. But throughout history, investment bubbles of all kinds—from railroads to the telegraph to fiber-optic cable—have had ultimately positive effects for the economy. Sure, portfolios stocked with Cisco purchased at its 2000 high are smarting. But the prices of Web hosting and long-distance phone service have fallen sharply as a result of the overinvestment in fiber-optic cable. Depending on where and when it comes, excessive investment in a particular sector can have some salutary long-term effects—and produce lots of collateral economic activity.

Take, for example, what many are already calling the successor bubble to the dot-com fiasco: the U.S. housing market. Last month, Northern Trust economist noted that "the performance of the housing market has played a visible role in payroll growth." She continues, "Employment in housing and related industries (sum of employment in the establishment survey under various categories related to housing industry) accounted for about 43.0% of the increase in private sector payrolls since the economic recovery began in November 2001."

That's huge. Especially since job growth has been remarkably weak for the past several years. According to the Bureau of Labor Statistics, there were fewer private-sector jobs in 2004 than there were in 2000. While the recession ended in November 2001, the United States lost payroll jobs for two more years, and payroll jobs—the jobs BLS tallies by asking companies how many people they have on their payrolls—didn't regain their pre-recession peak until January 2005. In this period, the BLS's household survey, which captures self-employed and part-time workers in addition to payroll jobs, has shown more growth, giving rise to what I dubbed antidisestablishmentarianism. But when it comes to payrolls, the economy remains several million jobs short of where it should be after a recession.

The jobs shortfall persisted in spite of heroic government efforts. After the recession came in 2001, followed by the attacks of 9/11, Congress and the White House jacked up spending and cut taxes massively, and Alan Greenspan sought to blow air into a slack economy by slashing interest rates furiously and keeping them low—which has proved a huge boost to the vast housing-related complex. Cheap and easy money begat higher home prices, which further boosted the demand for cheap and easy money, which begat higher home prices yet again. Meanwhile, falling interest rates allowed people to turn their homes into ATMs through mortgage refinancings.

Some might argue that all this money spent on housing could be better spent elsewhere—starting new businesses or paying down debt, for instance. But if we were going to have a tidal wave of excess liquidity flowing into any sector, real estate was as good a place as any—from a nationalistic and job-creation standpoint. After all, look what American corporations have done with Greenspan's gift. Easy money allowed them to clean up their balance sheets and borrow short-term for almost nothing. But they didn't deploy all that cheap money to create jobs in the United States. Instead, many large companies like IBM have cut jobs in comparatively slow-growth markets like America as they hire in comparatively higher-growth markets like India. Or they've invested overseas. As the Financial Times reported on June 23, "U.S. companies almost doubled their overseas investment in 2004, with foreign direct investment outflows jumping to $252bn from $141bn the previous year." Or they've simply hoarded the cash.

And thanks to global trade (and global geology), lots of the easy money consumers have borrowed in recent years has been spent in ways that don't directly create jobs in the United States. When Americans buy gas pumped out of Saudi sands, check in to resorts in Cancún, purchase toys for their kids at Wal-Mart, or even buy laptop computers from Dell and cars from the Chrysler dealership, that doesn't translate directly into many U.S. jobs. Why? Because so much of what we buy and consume is sourced or assembled offshore.

But real estate is another story. Almost by definition, spending on housing and housing-related goods tends to stay in-country. Even better, housing-related spending spreads riches more evenly throughout the economy than, say, investment in stocks. Sure, home builders and shareholders of Toll Brothers have gotten rich. But the jobs fueled by the housing boom to which Asha Bangalore is referring are white collar and blue collar, and they range up and down the income scale: mortgage brokers and lawyers, title insurers and deed recorders, appraisers and movers, architects and engineers, interior decorators and plumbers, hardware store managers and Home Depot clerks, manufacturers of cement and lumber. Spending on housing flows into a remarkably wide range of sectors—and the overwhelming majority of the spending is local.

Now, encouraging consumers to overspend on housing so they can stimulate the local economy may not be the best industrial policy. The bubble—or the long boom, take your pick—encourages people to take on a lot of risky debt to buy expensive homes. And if it does turn out to be a bubble, lots of people might get hurt, especially those logging on to this Web site. But bubbles' ends are notoriously hard to call. In the meantime, a lot of people are working. Where would we be without all those housing-related jobs?

The apparent reliance on housing to spur job growth could mean we're cruising for a fall if the red-hot sector shows signs of cooling. But it's also possible that housing was the bridge that helped us get over the post-bust job chasm. Between June 2004, when the Federal Reserve began raising rates, and April 2005, Bangalore notes, "housing and related industries have accounted for 13.0% of private sector payrolls." In other words, as talk of a housing bubble increased, other nonhousing-related sectors were retaking the lead in job creation. To paraphrase Thomas Jefferson, it could be that a little bubble now and then may be exactly what this economy needed.

Garden City 'bangalores' own-house dreams

2006-07-23T03:51:00.000-07:00

Garden City 'bangalores' own-house dreams
For the average Bangalorean, owning a house in the city will remain a dream
Cybermedia News

BANGALORE: “While "outsiders' are not the ones to be blamed, we cannot wish away the fact that "locals' cannot afford the high rents that IT professionals can pay and the general increase in the prices of every commodity because of a small percentage (may not remain small for long, though) of these men and women. Those who are non-IT professionals are shooed away when looking for a rented house (I have seen and experienced it myself) because the landlord prefers "Software" engineers. The disparity will, in my opinion, encourage increased corruption among the government employees.”

Thus wrote a blogger on the plight of Bangalore's locals. This is one of the subtler blogs, which represents the rising resentment of an average Bangalorean chasing the dream of his own space in this small city.

For an average middle class Bangalorean employed in the government sector, or many other sectors other than IT, the dream of owning a house in Bangalore will remain a distant dream. Real estate prices have spiraled in the past two years that he cannot even hope to rent a decent two bed-room house or apartment in any decent locality even in the peripheries of the city.

Appreciation in price has been almost 70 per cent in residential apartments, and land values have gone up by over 100 per cent in some cases.

Today, a two-bed room apartment in the outskirts of Bangalore will cost you nothing less than Rs 1500 per square feet. A 1200 square feet site will cost anywhere between Rs 650-Rs 1500 per square feet compared to Rs 150-350 in 2002. And the outskirts defined here are places beyond Devanahalli, Whitefield, Sarjapur, Electronic City, Hoskote, Kanakpura, Kengeri, Bannerghatta and even farther, which are a good 25-50 kilometers away from the city.

Rentals have also hit the roof in the past couple of years. No two-bedroom house is available in the peripheries of the city, for less than Rs 5000 per month (excluding, electricity, and water bills) and an advance ranging between Rs 50,000 to Rs 1 lakh.

The impact? To quote from T N Ninans' article in 'Business Standard', “High real estate prices lock the majority out of the housing market, and make more distant the dream of owning a home-in a country where the majority in our cities are not home-owners, and the majority of home-owners crowd their families into one- or two-room apartments. The second negative consequence of high real estate costs is that they drive up wages-because it has become more expensive to live in a big city. In other words, the competitiveness of Indian companies suffers.”

In 1991, with liberalization, Bangalore saw an influx of industries especially in the IT sector. This changed the face of the once sleepy city of Bangalore to one of vibrant industrial growth. With it, the real estate prices and rents started booming driven by increased investments by the IT industry and high salaries drawn by its employees.

Between 1991-94 Bangalore saw one of the major property price hikes even up to 200 per cent in some areas. Investments by NRIs also added to the boom.

From the peak level, prices started plummeting in 1995. Between 1995 and 2000, the property bubble built on speculations burst and prices declined by almost 30–40 per cent all across India, including Bangalore. There was a slight recovery in 1999-2000 period, riding on the dotcom boom.

However, between 2000 and 2001 came the dotcom bust, the stock market crash and UTI scam taking the property prices down.

The year 2002 saw the first signs of recovery in real estate prices, both residential and commercial and there has been no looking back after that. IT sector started flourishing taking investing in huge office spaces. Also started the influx of people from all across India and even from outside to one IT destination – Bangalore.

IT services sector grew leaps and bound and created many millionaires out of the burgeoning middleclass in the city. Soon followed the ITES/BPO boom. The IT sector with hundreds of thousands of companies acquired large chunks of the prime property within the city and moved on to the outskirts and beyond.

Another real estate boom started. Property prices for both residential and commercial spaces saw an increase of over 100 per cent and the rise continues in a frenzied pace. However, according to real estate research firms like Cushman and Wakefiled and Jones Lang Lasalle, unlike the 90's this time the rise in prices is not a bubble, but is driven by genuine demand from end users.

According to Jones Lang Lasalle, Bangalore accounted for 32 per cent, that is. nearly a third of all demand for office space in the metros across the country in 2004.

Where does this demand come from? The present real estate boom is riding on the growth of Information Technology sector in the country added with liberal home loan policies of banks.

It is estimated that between 2003 and 2006, IT companies acquired a total of 20-million sq. ft space. This also means large-scale recruitments taken up by IT firms. A recent reports also reveals that around 70 per cent of the IT professionals who earns big buck in Bangalore are outsiders.

The average age of a homeowner today is between 28 and 32. True to their age and purchasing power, the aspiration levels have also gone up. Today, the much read and traveled techies are looking for luxury apartments and villas and are willing to pay a premium for their dream houses.

An apartment or a villa worth Rs 1 crore and above is no more exclusive for business tycoons. It is an easy buy for a middle level manager in an MNC IT firm.

Many of these professionals are on a property-buying spree not only for accommodation, but also as a future investment. Real estate has become part of investment portfolio for many. So despite the skyrocketing prices, the demand for property is increasing.

Added to this, the government is also on a land allotting spree to IT firms and other industries in the name of technology parks and integrated townships. Soon after the news that Infosys is expected to get over 800 acres of land, a prominent English newspaper reported that huge chunks of land (1200 – 1700 acres of land are being developed in and around Bangalore, not only by big firms like Shapoorj Pallonji, but also by little known entities.

Comment by a Blogger: Bangalore Real estate

2006-07-23T03:34:00.000-07:00

Here is an interesting comment for one of my posts:

Every body has a dream to buy home on their own and i am writing this piece only for those who carry this dream to fulfill in bangalore.

Before you buy flat/house think on the following angle and make your decision

i) Increase in Property Cost , an APartment which was costing 25L last jul (2005) same is now 40L

ii) Banks which used to fund ealrier almost 100% , Now are not willing to fund more than 85% which means if you are buying a flat for 40L , you atleast need to have 6L cash in Hand

iii) Spiralling interest Rates....from 7% to 10.5% Fixed.

iv) and Top of all these the so Called "IT people" who everybody belives buys these apartments Still Cannot afford as Real Estate Prices have almost doubled in last 18 month where as salary increase has been just 15-20% max

v) and finally , Earlier people used to buy flats for investment now , now even investors aare scary in investing in real estate as Prices are astronomical

Be cautious and invest safe your hard earned money . Prices will defintely come down and boom is likely to go BUST .

Mark my words and you will not repent.
Think logically and tell me which factor of the above is favouring the real estate scenario and if you still think YES then go ahead with your plans.

Imagine a person taking a loan of 40L over 20 years. EMI he would have to pay is 35000. So, one should expect atleast 70 thousand as the salary which means the CTC would be 1 L per month. There will be very few people that get 1 L everymonth in MNCs and their number is not enough to cover thousands of apts costing 50L and more.

If you’re one of the millions of Indians who took a loan to purchase a home, you’ll know interest rates have been rising steadily.

But there was at least one saving grace — even if rates rose, the amount one paid out as equated monthly instalment didn’t change.

Instead, borrowers had the option of increasing the repayment period. From July, even that salve will become increasingly unavailable. Banks will be left with no choice but to hike EMIs. For the simple reason that increasing repayment tenures is no longer a viable option.

NOE HERS TEH CATCH READ IT CAREFULLY

Here’s why. Let’s say someone had taken a 20-year loan before June 2005, when the rate was 7.5%. At today’s prevailing rate of 9.5%, if the EMI were to be kept unchanged, the tenure would have to be extended from the original 20 years to 35 years even after the repayment of the last 12 months is taken into account!

That would be longer than most borrowers’ working lives. The more realistic option is obviously to hike EMIs, from Rs 806 per lakh borrowed at 7.5% to Rs 900 per lakh at 9% and Rs 932 per lakh at 9.5%. Most banks acknowledged that they might be forced to hike EMIs on existing floating rate loans.

NOw a little more hike in interest rate bancks will force to increase the EMI then will follow deluge of sales as most people are paying clsoe to 70-80% of net sal as emi and a little increase in EMI , will see the rsults .

If you dont trust me look at th elinks and check for yourselves what experts got to say

Rate hikes may wreck realtors’ party

Equity fall to temper real estate prices

Realty stocks lose their building blocks

Is mkt meltdown reducing realty rates?

Mumbai realty catches bourse flu

Property prices to fall soon: HDFC chief

Rising home loan rates: A realty risk

Wait and watch

Your dream house may remain a dream

Property market cools down

Home Loan: Clause & effect

Property balloon starts deflating

SKYSCRAPERS AND BUSINESS CYCLES

2006-07-23T02:31:00.000-07:00

MARK THORNTON
MARK THORNTON is a senior fellow at the Mises Institute

The skyscraper index, created by economist Andrew Lawrence shows a correlation between the construction of the world’s tallest building 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.

The skyscraper, that unique celebration of secular capitalism and its values, challenges us on every level. It offers unique opportunities for insightful analysis in the broadest terms of t wentieth-centur y art, humanity, and history. When criticism becomes captive to centers of power or prevailing theories or fashions, unwilling or unable to probe the process and the results, something important has gone wrong with one of the stabilizing and balancing forces of a mature society.

In the overheated speculation of the 1920s, as land prices rose, towers grew steadily taller. Or should the order be: as skyscrapers grew taller, land prices rose? The variables that contributed to real estate cycles were even more complex than this “chicken and egg” conundrum.

The skyscraper is the great architectural contribution of modern capitalistic society and is even one of the yardsticks for twentieth-century superheroes, but no one had ever really connected it with the quintessential feature of modern capitalistic history—the business cycle. Then in 1999, economist Andrew Lawrence created the “skyscraper index” which purported to show that the building of the tallest skyscrapers is coincidental with business cycles, in that he found that the building of world’s tallest building is a good proxy for dating the onset of major economic downturns. Lawrence described his index as an “unhealthy 100 year correlation.”

The ability of the index to predict economic collapse is surprising. For example, the Panic of 1907 was presaged by the building of the Singer Building (completed in 1908) and the Metropolitan Life Building (completed in 1909). The skyscraper index also accurately predicted the Great Depression with the completion of 40 Wall Tower in 1929, the Chrysler Building in 1930, and the Empire State Building in 1931. There are, however, important exceptions in the ability of the index to predict, so the first question is: how good of a predictor is the skyscraper index?

Second, what is the nature of the relationship between skyscraper building and the business cycle? Surely, building the world’s tallest building does not cause economic collapse, but just as clearly, there are economic linkages between construction booms and financial busts. What theoretical connections can be made between skyscraper building and business cycles? Andrew Lawrence noted overinvestment, monetary expansion, and speculation as possible foundations for the index, but did not explore these issues. With the destruction of the World Trade Towers and the increased threat of terrorism, the skyscraper index may have already lost its usefulness for future prediction,1 but even if that were the case, the theoretical linkages between skyscraper building and business cycles may still have usefulness in improving our understanding of business cycles and the economic theory behind them.

In order to better examine the relationship, the evidence in support of the skyscraper index is examined and compared to the reliability of other market indicators. The ability of most market indicators is found to be weak, while the ability of the skyscraper index to predict severe changes in the business cycle is strong. The general relationship between the business cycle and skyscraper building is examined with respect to the role of “Cantillon effects” in skyscraper cycles. The unique and distinguishing features of abnormally large swings in the business cycle, as manifested in record-setting skyscrapers, are then shown to be uncommon features of most business cycle theories and a unique feature of the Austrian school’s theory of the business cycle. Finally, the data linking the world’s tallest skyscrapers and business cycles is reexamined to evaluate the index’s incorrect predictions and as a result the index is shown to be more accurate than previously thought.

DO SKYSCRAPERS PREDICT?

Lawrence (1999a) was apparently the first to make the claim that the construction of the world’s tallest building was correlated with impending financial crisis although the subject of the world’s tallest skyscrapers and their relation to economic crisis is also prominent in Grant (1996). Lawrence showed that in almost all cases the initiation of construction of a new record-breaking skyscraper preceded major financial corrections and turmoil in economic institutions. Generally, the skyscraper project is announced and construction is begun during the late phase of the boom in the business cycle; when the economy is growing and unemployment is low. This is then followed by a sharp downturn in financial markets, economic recession or depression, and significant increases in unemployment. The skyscraper is then completed during the early phase of the economic correction, unless that correction was revealed early enough to delay or scrap plans for construction. For example, the Chrysler Building in New York was conceived and designed in 1928 and the groundbreaking ceremony was conducted on September 19, 1928. “Black Tuesday” occurred on October 29, 1929, marking the beginning of the Great Depression. Opening ceremonies for the Chrysler Building occurred on May 28, 1930, making it the tallest building in the world.

The business press reported Lawrence’s findings positively, but not with much fanfare. Investors’ Business Daily seemed somewhat sympathetic to his “impressive” evidence, but asked “How could something bad come of building the world’s biggest skyscraper? After all, bigger is better. Having the biggest building on earth can be a source of national pride” (Investors’ Business Daily 1999). Also positive was Barron’s who seemed to agree that it was an “excellent forecasting tool for economic and financial imbalance” (Pesek 1999a). Business Week also made mention of the skyscraper index, although the first and most concerned reports of the index came from the Far Eastern Economic Review which noted that China was planning on breaking the record for the world’s tallest building and constructing three of the 10 tallest buildings on the planet by 2010.

The reason for the rather muted response to the skyscraper index is that most “indicators” have failed to remain robust and not pass the test of time. Indeed, the skyscraper index has not predicted all major economic collapses such as the depressions of 1920–21, 1937–38, and 1981–82 and has predicted economic collapse when downturns were relatively mild such as 1913 and the early 1970s. The index could easily become obsolete due to factors such as terrorism and the evolving nature of the economy. There have been numerous indicators put forth to help us predict the business cycle and stock markets.

The Super Bowl indicator, for example, predicts that if a team from the
National Football Conference (the old NFL) beats the team from the American Football Conference in the Super Bowl game, it should be a good year for the stock market and ipso facto a good year for the economy. This is a classic case of a “coincidental” indicator in that the statistical relationship is only a matter of coincidence.3 There are seasonal indicators like the January effect, which has only questionable causal links, and political indicators relating to the political business cycle theory which also makes suggestions as to when and how the economy and the stock market will perform. Leading indictors with good causal-economic links with the economy include the inverted yield curve and the index of leading economic indicators, the once official crystal ball of the economy that lately has had greater difficulty accurately predicting changes in the economy. In fact, the cost and difficulties of maintaining the index led in recent years to it being privatized.4 Economist Richard Roll explained that such indicators have only fleeting value for real-world investing:

I’m not just an academic but also a businessman . . . we could sure do a
heck of a lot better for our clients in the money management business than we’ve been doing. I have personally tried to invest money, my client’s money and my own, in every single anomaly and predictive device that academics have dreamed up. . . . I have attempted to exploit the so-called year-end anomalies and a whole variety of strategies supposedly documented by academic research. And I have yet to make a single nickel on any of these supposed market inefficiencies.

The problems with indicators are many. Some have a poor track record of predictions, while others have a good track record but without any economic rationale (e.g., the Super Bowl indicator) and thus offer little confidence that the track record is not simply a statistical anomaly. Other indicators offer mixed signals, such as the January effect, which can be based either on the performance of the stock market (which one?) during the first week of January, or during the entire month. The January effect is also said to suffer from the fact that once everyone is aware of the effect, it becomes anticipated and therefore no longer offers reliable investment advice or insight into the economy. As a result, such indicators do not have a much better record predicting the business cycle than professional economists.

The skyscraper index, in contrast does have a good record in predicting important downturns in the economy. This index is a leading economic indicator in that the announcement of building plans predates the onset of the economic downturn. There have been four major skyscraper booms in the twentieth century interspersed by periods of relative normality and less severe business cycles. Table 1 presents the history of the world’s tallest buildings that demonstrates that many major economic downturns were associated with the building of the world’s tallest skyscrapers. A more visually-enhanced perspective of this history is provided for in Figure 1.

The first skyscraper cycle occurred between 1904 and 1909 and included the Singer Building becoming the world’s tallest when completed in 1908 and the Metropolitan Life Building setting a new record in 1909. The Panic of 1907 occurred at a time when seasonal factors relating to fall harvests coincided with cyclical factors in money and credit. It was ignited into financ ial panic when a bank regulated under the National Banking system refused to clear funds for the Knickerbocker, an unregulated trust. The result was widespread runs on banks and one of the sharpest downturns in American economic history. This episode is particularly important and of continuing relevance because it is widely considered to be a key event in the passage of the Federal Reser ve Act in 1913. The Panic is widely considered to have been caused by problems associated with the structure and regulation of the National Banking system. The solution adopted was to increase the size and regulatory power of the national government in matters of money and banking, although in recent years some economists have questioned whether that was the proper response.

Bypassing the Woolworth Building, which at first does not seem to fit the general pattern in Lawrence’s analysis, the second episode of the world’s tallest buildings occurred at the onset of the Great Depression. Three record setting skyscrapers were announced during the late 1920s, when the stock market boom was being matched by booms in residential and commercial construction. In 1929, the skyscraper at 40 Wall Street was completed at 71 stories, followed by the Chrysler Building in 1930 at 77 stories, and the Empire State Building in 1931 at 102 stories. Clearly, there was a capital-oriented boom in the construction of ever-taller buildings before the Great
Depression.

Economists have offered many different explanations for the Great Depression and Robert Lucas (1987) has even claimed that it defies explanation. What should be clear is that there was a significant increase in the money stock between the founding of the Federal Reserve and the stock market crash, a significant restructuring in banking and bank regulation, a significant decline in the supply of money after the crash, a significant number of bank failures, and a variety of other important factors that contributed to the initiation and duration of the depression, including the Smoot-Hawley tariff and the New Deal.

The third major cycle of skyscraper records occurred in the early 1970s. Once again the economy was coming off a strong and sustained boom in economic activity during the 1960s. The economic downturn of 1970 marked the beginning of more than a decade when the economy struggled with inflation and recession, as well as disrupted institutions and markets. From 1970 to 1982 the American economy suffered from stagflation, several deep recessions, and from high levels of the misery index (inflation rate + unemployment rate). As the last vestiges of the gold standard were being abandoned and the Bretton Woods system was disintegrating, construction workers in New York and Chicago were busy building the next set of the world’s tallest buildings.

Breaking records set in the early days of the Great Depression, One World Trade Center was completed in 1972 and Two World Trade Center was completed in 1973, both of 110 stories. In Chicago, the Sears Tower was completed in 1974, which was also 110 stories but reached a height of 1,450 feet compared to the 1,368 feet of the World Trade Towers. Once again, economists failed to anticipate the downturn in the economy, failed to provide a good explanation for the economic problems, and did not provide effective remedies for the economic problems of the day. Even though high oil prices occurred after the economy began its contraction, the theory of “supply
shocks” was born.

The fourth cycle ushered in the East Asian economic crisis. The Pacific Rim countries such as Hong Kong, Malaysia, Singapore, Vietnam, and South Korea experienced significant economic growth during the 1980s and 1990s.

The upshot is that the deep 1973–75 recession was caused only in part by increases in oil prices per se. An equally important source of the recession was several years of overexpansionary monetary policy that squandered the Fed’s credibility regarding inflation, with the ultimate result that the economic impact of the oil producers’ actions was significantly larger than it had to be. Instability in both prices and the real economy continued for the rest of the decade, until the Fed under Chairman
Paul Volcker reestablished the Fed’s credibility with the painful disinflationary episode of 1980–82. This latter episode and its enormous costs should also be chalked up to the failure to keep inflation and inflation expectations low and stable. In contrast to the 1970s, fluctuations in oil prices have had far smaller effects on both inflation and output in the United States and other industrialized countries since the early 1980s. In part this more moderate effect reflects increased energy efficiency and other structural changes, but I believe the dominant reason is that the use of constrained discretion in the making of monetary policy has led to better anchoring of inflation expectations in the great majority of industrial countries.

With the region’s leading economy, Japan, in recession and stagnation for much of the 1990s, the “Asian Tigers” were considered miracle economies because they were strong and durable despite being small and vulnerable. The Petronas Towers were completed in Kuala Lumpur, Malaysia in 1997 setting a new record for the world’s tallest building at 1,483 feet beating the old record by 33 feet (the two towers were only 88 stories high compared with the 110 story giants built in the early 1970s). It marked the beginning of the extreme drop in Malaysia’s stock market, rapid depreciation of its currency, and widespread social unrest. Financial and economic problems spread to economies throughout the region, a phenomenon known as the “Asian Contagion.”

The common pattern in these four historical episodes contains the following features. First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies which in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital and technology-intensive industries. While this analysis concentrates on the U.S. economy, the impact of these crises was often felt outside the domestic economy.

It would be very easy to dismiss the skyscraper index as a predictor of the business cycle, just as other indicators and indexes have been rightly rejected. However, the skyscraper has many of the characteristic features that play critical roles in various business cycle theories. It is these features that make skyscrapers, especially the construction of the world’s tallest buildings, a salient marker of the twentieth-century’s business cycle; the reoccurring pattern of entrepreneurial error that takes place in the boom phase that is later revealed during the bust phase. In the twentieth century the skyscraper has replaced the factory and railroad, just as the information and service sectors have replaced heavy industry and manufacturing as the dominant sectors of the economy. The skyscraper is the critical nexus of the administration of modern global capitalism and commerce where decisions are made and transmitted throughout the capitalist system and where traders communicate and exchange information and goods, interconnecting with the telecommunications network. Therefore it should not be surprising that the skyscraper is an important manifestation of the twentieth-century business cycle, just as the canals, railroads, and factories were in previous times.

CANTILLON EFFECTS IN SKYSCRAPERS

Cantillon effects are named for their discoverer, Richard Cantillon, who iswidely credited as the first economic theorist, and in particular, was the first to show that changes in the money supply and credit have important impacts on the economy by changing relative prices.7 Cantillon showed that an increase in the supply of money would cause economic expansion, but that ultimately the process would be self-reversing as prices would rise and imports would increase, sending money back out of the economy. Cantillon further showed that monetary inflation does not affect all prices equally or at the same time, but in sequences that depend on the spending behavior of money holders all along the channels of monetary flows. These ideas have
been adopted and extended by Knut Wicksell, Ludwig von Mises, and F.A. Hayek and more recently by McCulloch (1981) and Garrison (2001).

Cantillon effects are the real fundamental changes in resource allocation that result from changing relative prices between the time of the creation of new money and the full adjustment to the increase in supply. For Cantillon, an increase in commodity money, such as silver, would increase employment and prices. It would impose “forced savings” and lower real incomes on those whose income was not changed due to monetary inflation, possibly leading to unemployment or emigration. If the money supply increased due to a balanceof-payments surplus, then the additional money could cause an increase in manufacturing or expansion in whatever the new money holders chose to spend their money on.

Most importantly, changes in the supply of money can have effects on the interest rate and once again the effect will depend on how the money enters the economy. On the one hand, if it comes into the hands of traditional borrowers or lenders, such as developers, the rate of interest would initially fall. This is similar to the Austrian theory of the business cycle in that when banks expand the money supply and lower the interest rate below what it would have been borrowers invest in longer term capital projects. On the other hand, if the money came into the hands of consumers, the rate of interest might rise as suppliers attempt to meet the new demand for goods. In the Austrian view, changes in the interest rate change the relative price between longer-term capital projects and shorter-term capital projects. A lowering of the interest rate raises the prices of longer term capital goods relative to shorter term capital goods.

In response to the change in relative p rices, more resources are allocated to long-term capital goods. Unlike other aspects of the self-adjusting market process, such as money, land, labor, and short-term or intermediate capital goods, these resources become suspended or fixed in long-term fixed capital goods. These resources become formulated in a highly-specific capital good that may not be well-suited to the alternative production processes of the post-adjustment economy. As a result, all of the adjustment in these long-term fixed capital goods must come from a change in price and this will entail large losses and possible bankruptcies by the owners of these capital goods. To the extent that these types of adjustments are widespread, they pose a threat to capital markets and the banking system.

The Cantillon effect works much like the Alchian and Allen effect, a simple application of price theory, the bread and butter of economic analysis. Economists Armen Alchian and Richard Allen answered the question: Why are high quality apples shipped out of apple-growing regions, leaving only lower grade apples for the local market? They explain that the cost of transporting apples from Washington State across the country is a “flat” rate per crate of apples. This fee lowers the relative price of higher quality apples for consumers in nonproducing states and raises it in producing states. If a highquality apple cost $1 and a standard quality apple cost $0.50 then the relative price is 2-to-1. If a transport fee of $0.50 per apple is charged then the prices are $1.50 for high quality and $1.00 for standard quality and thus the relative price of the high-quality apples falls from 2-to-1 down to 1.5-to-1. In Washington the consumer must forgo 2 standard quality apples when purchasing 1 high quality apple, but in nonproducing regions the consumer need only forgo 1.5 standard quality apples. Therefore the change in relative prices
explains why the preponderance of high-quality apples are shipped out, leaving the local markets with lower-quality apples. The same is true for other products such as lobsters from Maine and potatoes from Idaho, a result now known as the Alchian and Allen effect. The impact of relative price changes has proven to be a useful puzzle solver in areas outside of the grocery store. Changes in relative prices also affect the type of capital goods produced.

Modern economics has great difficulty in dealing with real-world capital goods and mainstream economists have gone to great pains to ignore the heterogeneity of capital and to great lengths to count, or add up what are otherwise dissimilar and unique items like skyscrapers, factories, and mining operations. Treating capital goods as homogeneous goods that can be counted has facilitated much of neoclassical theorizing, but is also a major blind spot for neoclassical economists when issues and answers rest on the heterogeneity of capital. However, some inroads have been made to correct this blind spot and to consider the heterogeneity of capital as a focal issue. For example, Goolsbee (1998) applied the Alchian-Allen effect to the case of tax subsidies for capital good purchases and found that such subsidies induce buyers to purchase higher-priced machinery, rather than greater quantities of capital goods. Basically, tax subsidies allow buyers to substitute tax-subsidized quality for nonsubsidized expenditures such as training and future maintenance, thereby tipping the balance of relative prices in favor of higher-quality capital goods. In this very short-run orientation, capital goods do not change, only their composition, and there is a large dead weight loss associated with the tax subsidy.

While this application is certainly illustrative of the impact of changes in relative prices on capital allocation, it did not address the longer run orientation of changes in the production side of the economy. In effect, Goolsbee addressed the issue of how well do two different qualities of cooking pans sell when subject to a 10 percent discount, but not whether new high-tech pans will be introduced or if production will take place in the supplier’s garage or in a humongous factory with computers and robots doing much of the work. How productive and “roundabout” the process of production is will depend crucially on what capital goods are selected and built.

The skyscraper is considered an art form, but its construction is essentially a business that must pay heed to incentives and constraints and therefore skyscraper construction can be expected to closely follow even small changes in relative prices. In reevaluating the early skyscraper artistically, Huxtable noted:

Essentially, the early skyscraper was an economic phenomenon in which business was the engine that drove innovation. The patron was the investment banker and the muse was cost-efficiency. Design was tied to the business equation, and style was secondary to the primary factors of investment and use. . . . The priorities of the men who put up these buildings were economy, efficiency, size, and speed.

That is not to say that the early skyscrapers were without artistic merit, or that later structures failed to improve artistically, quite to the contrary. Nevertheless, post-World War I skyscrapers continued to emphasize profits and technology. The early skyscraper drew from existing technology and was considered an engine of innovation. Even in modern times, design continues to grow and evolve, but the “structural rationale for such a tall structure is technically and economically nescapable.”10 For Huxtable (1992, p. 105) “Architecture simply doesn’t count. . . . With pitifully few exceptions in the past, New York’s skyscrapers have never reached for anything but money.” And while technology is certainly an awe-inspiring facet of skyscrapers, it should be remembered that the important technology of the first “skyscrapers” in the late nineteenth century was already available before the Civil War and that the basic “structural principles of the tall building, developed by the turn of the century, have remained essentially unchanged.”11 Art, technology, government regulations, and even ego must be considered, but the skyscraper is essentially a captive of economic forces and motives. Therefore when architects are
asked what makes for the “super skyscraper,” economic forces are considered preeminent, or as Robert Sobel meekly put it, “I think there are financial forces working to make this happen.”

Changes in the rate of interest (the relative price between consumption goods and capital goods) can have three separate Cantillon effects on skyscrapers. All three effects are reinforcing and all three effects are interconnected to the transformation of the economy toward more roundabout production processes. When the rate of interest is reduced, all three effects contribute to the desire to build taller structures. The world’s tallest buildings are generally built when there is a substantial and sustained divergence between the actual interest rate and the natural rate of interest, where the actual rate is below the natural rate as a result of government intervention. When the rate of interest increases, the financial effects all reduce the value of existing structures and the demand to build tall structures and when combined with depressed economic activity, the desire to build at all.

The first Cantillon effect is the impact of the rate of interest on the value of land and the cost of capital. A lower rate of interest tends to increase the value of land, especially in the central business districts of major metropolitan cities. Land values rise because lower rates of interest reduce the opportunity cost or full price of owning land. Treating the rate of interest as an exogenous cause, a reduction in the interest rate will increase the demand for land and result in an increase in land prices. However, the overriding issue with land is “location, location, location,” so that the interest rate will have differential effects on and prices.

When the rate of interest is falling, the land best suited for the production of the longer term, more capital intensive and more roundabout methods of production will increase in price relative to land better suited for shorter term, more direct methods of production. As land prices generally rise, the yield from any piece of land that would make ownership of it profitable also rises. Combined with a lower cost of capital brought about by a lower rate of interest, land owners will seek to build more capital-intensive structures and at the margin this will cause land to be put to alternative uses. In the central business district this means more intensive use of land and thus higher buildings. Simplified, higher prices for land reduce the ratio of the per-floor cost of tall vs. short buildings and thus create the incentive to build buildings taller to spread the land cost over a larger number of floors. Lower rates of interest also reduce the cost of capital which facilitates the ability to build taller. Thus, higher land cost leads to taller buildings.13

The second Cantillon effect from lower rates of interest is the impact on the size of the firm. A lower cost of capital encourages firms to grow in size and to become more capital intensive and to take advantages of economies of scale. Production and distribution become more specialized and take place over a larger territory. Instead of a dairy farmer raising cows and producing milk for the domestic market, larger firms raise a greater quantity of dairy cattle, ship raw milk to processing plants and ship processed dairy products back to wholesale and retail distribution sites. The production of dairy products becomes more roundabout, but also more productive. As part of this more roundabout production process, firms develop central offices or headquarters, as well as marketing offices within their market territory. This increases the demand for office space in central business districts. This demand in turn raises rents and encourages the building of more, and still taller, office buildings within the central market district.

The third Cantillon effect is the impact on technology of constructing taller buildings. Inevitably, record-breaking skyscrapers require innovation and new, untried applications of technology. Buildings that reach new heights pose numerous engineering and technological problems relating to such issues as building a sufficiently strong foundation, ventilation, heating, cooling, lighting, transportation (elevators, stairs, parking), communication, electrical power, plumbing, wind resistance, structural integrity, fire protection and building security. There is also a host of “public” issues connected with increases in employment density brought about by tall structures, such as transportation congestion and environmental concerns.14 Beyond the mere technology it takes to build the world’s tallest building, every vertical beam, tube, or shaft in a building takes away from rentable space on each floor built, and the more floors in the structure, the greater the required capacity of each system in the building, whether it is plumbing, ventilation, or elevators. Hence, there is a tremendous desire to innovate with technology in order to conserve on the size of building systems or to increase the capacity of those systems. Therefore, as the height of construction rises, input suppliers must go back to the drawing board and reinvent themselves, their products, and their production processes.

All three Cantillon effects resulting from lower rates of interest are, of course, interrelated and reinforcing. All three are generally recognized by those involved in the building of large office buildings including architects, bankers, contractors, design specialists, engineers, entrepreneurs, finance specialists such as bond dealers, government regulators, and the tenants themselves. In addition to the location and prestige of a skyscraper address, tenants place higher value on office space with better light, view, and networking opportunities.15 Higher interest rates discourage the building of taller buildings and of construction in general because capital is scarcer and land is less in demand and available at lower prices. Existing structures experience financial difficulties that relate back to Cantillon effects, such as higher borrowing costs, lower capital asset values, and a decreased demand for office space. Firms engaged in office building construction and their suppliers face a decrease in the demand for their services, the impact of which falls hardest on those firms who specialize in the production of the tallest buildings. It is not atypical for the owners of such buildings and the builders of such elaborate construction projects to go bankrupt during economic slumps.

The interest rate is what makes the construction business, in part, such as speculative business. Home builders build “spec houses” and face the risk of finding a buyer at a profitable price. Developers build speculative office buildings which in contrast to many corporate headquarters are investments that rely on an uncertain flow of rental income. Separating the winners from the losers is not as much a matter of greed as it is a matter of time. Carol Willis explained the difference between normal times and boom times.

In normal times, when costs of land, materials, and construction are redictable, developers use well-tested formulas to estimate the economics of a project. These calculations are based on the concept of the capitalization of net income. This value takes into account the net income for thirty or forty years . . . the conventional market formulas and the concept of economic height were widely known and followed in the industry. Most speculative building was not risky, but reserved in its calculations and highly responsive to market desires.

All of the normal calculations that help ensure profit and avoid loss are not, however, reliable during the boom phase of the business cycle. As Willis explained :

In booms, the so-called rational basis of land values is disregarded, and the answer to the question “What is the value of land?” becomes “Whatever someone is willing to pay.” Some speculators estimate value on new assumptions of higher rents; others simply plan to turn a property for a quick profit. . . . But due to the cyclical character of the real estate industry, the timing of a project is crucial to its success, and the amount a property reaps in rents or sale depends on when in a cycle it is completed or comes onto the market.

Building the world’s tallest building has been a matter of particularly bad timing by entrepreneurs and even if they were able to successfully steal away enough tenants from the remaining pool of renters, the economic problem for society is that valuable resources are lost in the process of constructing buildings that are bad investments and underutilized.16 However, it is not the entrepreneur’s formula that is at fault, but a system-wide failure that has occurred periodically throughout the twentieth century and before, known as the business cycle. Hoyt (1933) found the building cycle was a “motion of a definite order” lasting 18 years, on average, from peak to peak. But Willis raised the key issue as it relates to skyscrapers:

Indeed, a key question about cycles is, if their pattern is so predictable, why don’t people foresee the inevitable bust? This conundrum can perhaps be answered by looking more closely at the dynamics of speculation and at a typical skyscraper development.

After the collapse of an inflated market, it is easy to look back on the grave errors of judgment that preceded a crash; yet the basic indicators of the twenties economy seemed to promise unimpeded growth. Pent-up demand for office space after World War I, the expanding numbers of the white-collar workforce, and the increasing per-person average for office space all fueled the building industry. Each year, the summaries of annual construction figures reported record numbers.

Willis did correctly identify that “easy financing underlie all booms,” but this does not answer her conundrum because easy financing and low interest rates are also at the heart of genuine economic growth. The entrepreneur’s problem is that profit calculations cannot show for sure whether interest rates will remain low and projects will succeed (economic growth) or rates will rise and projects will fail (business cycle). It seems that only time will tell. Furthermore,it should be made clear that low interest rates and “easy financing” are terms not defined on the basis of their magnitudes, but in relation to their natural rates and levels—based on savings, which are not known or observable. Increases in the money supply will tend to generate increases in construction spending, but nominal interest rates (the most visible rate) tend to move with may indeed have a predictable pattern, but its timing and magnitude may be
beyond rational human construction. Overbuilding by the construction industry is not a problem of the construction industry per se, but a problem of too much financing and some sort of government-caused distortion. For example, Hendershott and Kane (1992, pp. 61–69) made the following conclusions concerning the construction boom of the 1980s:

Why did our nation overbuild so much and so long? The answer lies largely in the distortion of private incentives by misguided governmental policies on both the regulatory and legislative fronts. . . . Building requires both construction and permanent financing; overbuilding requires too much of each, financed at too low a rate . . . developers have traditionally used substantial debt financing and this tendency was especially strong in the U.S. during the 1980s. Highly leveraged building projects were a natural response to government-distorted incentives.

The history of speculative bubbles in construction is paralleled by a history of big increases in debt financing whether it is generated by endogenous factors, gold flows, central banks, or in this case bank regulators.

BUILDINGS AND BUSINESS CYCLES

As Abraham and Hendershott (1994, p. 15) have noted: “We don’t really know what starts the speculative bubbles.” The problem with business-cycle theories is that they are often more like descriptions of business cycles rather than theories about business cycles and their causes. Each description emphasizes particular features which are then raised to the status of causal forces. Each stage of the business cycle is characterized by several features (e.g., speculation, unstable supply of money, decreased aggregate demand, and exogenous real factors). As a result, business-cycle theories are generally “perspectives” in which the economist has identified institutions to place blame along with their preferred remedies. One solution to this problem is to recast the business cycle with its paired features and then analyze those features with economic theory to provide a theoretical understanding of the business cycle.

As such, business cycles are reoccurring sequences of varying length of expansions, downturns, contractions, and upturns in many types of economic activity such as production, employment, income, sales, housing starts, money, credit, and prices. Interest rates, inventories, fixed capital, and loans outstanding tend to be procyclical.

Expansions and booms are generally characterized by low and stable interest rates, increased borrowing and credit formation, increases in the monetary stock and money supply, and investment speculation. Employment increases and so does production. Prices of capital assets, stock prices, and land values all tend to increase during the expansion phase of the business cycle. Speculation could cause such an expansion based, for example, on changes in expectations of the future. However, speculation is unlikely to be the first cause of a reoccurring cyclical phenomenon, although it certainly is a regular component of that phenomenon known as the expansion or boom.

Likewise, investment is an important component of the expansion phase but it too has prior causes. Endogenous investment could ignite an expansion and increase the amount of loans and the money supply, but again such a change is unlikely to represent a reoccurring cyclical phenomenon. Most importantly, increased speculation and the related concept of increased investment would normally not represent the potential for systemic error on the part of investors because in each case their actions were based on groupwise assessments of future conditions. It would be most unlikely that such economy-wide assessments would be systemically incorrect on an on-going basis. Therefore, while it is imaginable that entrepreneurs might self-ignite an economic expansion, and that such an expansion could turn out to be false, it is unlikely that they would continue to self-ignite self-defeating expansions on a reoccurring basis.

The economy can also experience an expansion if there is an increase in the supply of loanable funds. If the supply of saving increases due to a decrease in time preference, then interest rates fall and more resources are made available to entrepreneurs to invest in future production. The result is that the rate of economic growth will increase and consumption will increase when the new investments come on line and start producing. Banks can also simulate an increase in the supply of saving by reducing bank reserves held against demand deposits. It is unlikely that a single bank could influence the market rates of interest with this approach or orchestrate a significant or sustained reduction in interest rates via this mechanism. It would also be odd for an industry to reduce the price of its product in order to sell more loans to less desirable customers and thereby put the assets of banks at greater risk.

It is possible for a central bank or monopoly bank to reduce the market rate of interest by providing banks with additional bank reserves. The lower interest rate will induce a reduced amount of saving and an increase in the amount of borrowing, heavily weighted to investment expenditures. The gap between the increased investment and the decreased savings is filled with resources paid by “forced savings.”

The interest rate, which normally establishes the intertemporal market clearing between saving, investment, and consumption, is here the source of important imbalances. First it establishes an increased responsibility to pay (borrowed funds) with a decreased ability to buy (reduce interest income from savings). Second, when interest rates are perceived to be stable and the market rate is reduced from the natural rate of interest that would have existed in the market, entrepreneurs are enticed to invest in more roundabout methods of production. Entrepreneurs simultaneously begin the development of new, more capital-intensive and less labor-intensive means of production that are more roundabout and efficient given the new interest rate signals they face.

An office building is a capital good that is used to bring a variety of consumer goods to market in the sense that production in the office building involves the decision-making process over all aspects of the firm. Its use is ubiquitous in “big business” and is totally absent in small businesses such as family farms, hot dog stands, plumbing services, auto body repair shops, etc. As such, the office building is a critical capital good in very roundabout production processes that represent virtually all modern production and all cutting-edge goods and service production. The modern economy is inextricably linked with the large office building or as Carol Willis put it: “Skyscrapers are the ultimate architecture of capitalism.”

The skyscraper is not just a large version of the office building. Skyscrapers can be used to house the offices of a single corporation, the central offices and branch offices of multiple corporations, hotel and residential living space, commercial space, convention space, a wide variety of personal service businesses
and specialized tenants such as stock exchanges, theaters, and television studios. As such, the skyscraper can serve as a much larger and more advanced office building (being both more productive and producing a higher-quality service). It can even take on the status of a business community or specialized form of privately-controlled marketplace. Naturally, greater amounts and diversity of production are possible in larger skyscrapers. The world’s tallest building, past and present, also adds the status of a distinct address.

All of these views are well expressed by Robert Shiller:

I think that most price movements of any size are unrelated to news about fundamentals. The most straightforward explanation, then I think, is one that is inconsistent with market efficiency—namely, a speculative bubble. People were selling, in short, simply because they thought other people were going to sell . . . I will say, however, that such speculative behavior is kind of a depressing lesson for economists. It’s very difficult for us to model these things; it suggests we have learned the wrong research skills. The strong suggestion from this evidence is that much that occurs in financial markets doesn’t make sense in terms of fundamentals.

I also suspect that what we have recently learned about financial markets probably extends to macroeconomic issues as well—that is, to matters like the business cycle. For example, there’s a recent fashion in the macroeconomics literature called “real” business cycle models. Such models try to make sense out of macroeconomic fluctuations entirely in terms of optimal responses to new information about fundamentals. In fact, the only thing that drives most of these models is technological change. That is, the ups and downs of the business cycle are being caused predominantly by technological progress, which uproots some industries while giving rise to others.

How not to design a flyover

2006-07-16T09:26:00.000-07:00

MUST READ

How not to design a flyover

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K’mangala-Indiranagar stretch opens

2006-07-16T09:25:00.000-07:00

K’mangala-Indiranagar stretch opens
Deccan Herald

What was scheduled to happen in 2004, will finally happen today. Road users will finally let out a collective sigh of relief when the long-pending Koramangala-Indiranagar stretch will be inaugurated on Wednesday.

However, the Bangalore Development Authority’s Airport Road flyover project, that began in February 2003, is far from over. Only the main flyover, at the intersection of Airport Road and Inner Ring Road junction will be inaugurated. The four loops around the flyover still remain incomplete.

BDA plans to inaugurate one loop a month, which will perhaps drag the final completion to September.

The flyover will be inaugurated by Chief Minister H D Kumaraswamy on Wednesday morning at 9.30 am. Those heading to work via Airport Road may be in for slow moving traffic, as the event timing would coincide with peak hour traffic. Vehicular movement will be allowed on the two-way flyover from 11 am onwards.

Wrecked, already?

Will the newly constructed flyover bear signs of ‘destruction’ on the inaugural day? Some motorists complained on Tuesday that the flyover was dug up on the middle of the newly-laid road to build the pandal for the event. According to Salil Shankar, who works in Indiranagar, “the road was spoilt even before it was inaugurated”. Fuming against the organisers, the BDA, Shankar said, “Who is going to finally pay for the repairs? The taxpayer, of course. Is this the level of responsibility the builders have towards their own project?”.

Flyover triggers floods?

2006-07-16T09:24:00.000-07:00

Flyover triggers floods?
Deccan Herald

The inauguration of the flyover connecting Indiranagar to Koramangala on Wednesday may have brought cheer to road users, but residents of HAL II Stage are frowning with apprehension.

The inauguration of the flyover connecting Indiranagar to Koramangala on Wednesday may have brought cheer to road users, but residents of HAL II Stage are frowning with apprehension.

It is not the increased vehicular traffic they fear, they are worried that the flyover might trigger floods in their locality.

Members of the HAL II Stage Residents’ Welfare Association participated in the inaugural function, not to join in in the celebrations, but to present a memorandum to Chief Minister H D Kumaraswamy expressing their woes.

Downward slope

According to M Chandra Reddy, President of the Association, the newly-laid road has a downward slope and thanks to insufficient drainage facilities, the water could flow into the low-lying residential bylanes.

“There has been no concern for local residents when the flyover was built. We never had a flooding problem until a few years ago, now we live in dread every monsoon,” Reddy said.

The storm water drain, running along the flyover, has only increased their problems.

Yet to recover from last October’s deluge, which claimed one life in the area, the residents feel the primary drain is choked with construction debris of the flyover, resulting in overflow after heavy rains.

“The situation is so bad, there are old-time residents who have either sold their houses or given it on rent and shifted to other places,” said K K Gopalakrishnan, Vice-President of the association, added.

BDA responds

Meanwhile, BDA Commissioner M K Shankarlinge Gowda assured that the storm water drain will be cleared after the completion of the project.

“The residents are fearing imaginary ghosts. There is no threat of flooding due to the flyover. We will ensure that the SWD is cleaned,” Mr Gowda said.

Finally, flyover on Airport Road inaugurated

2006-07-16T09:23:00.001-07:00

Finally, flyover on Airport Road inaugurated
Deccan Herald

The flyover connecting Koramangala to Indiranagar on Airport Road was inaugurated on Wednesday after a delay of over two years.

The flyover connecting Koramangala to Indiranagar on Airport Road was inaugurated on Wednesday after a delay of over two years.

As if living up to its dubious reputation, even the inauguration ceremony was delayed by nearly three hours, due to the late arrival of Chief Minister H D Kumaraswamy.

Airport Road witnessed the same degree of traffic chaos on Wednesday, as it had seen everyday as the construction work was taken up by the Bangalore Development Authority in 2003. Traffic congestion on Airport Road began as early as 8.30 pm, as the CM was scheduled to arrive at 9.30 am, and continued till the CM’s convoy departed at 2.30 pm.

‘Time-bound’

Mr Kumaraswamy, however, promised, in his inaugural speech, that the infrastructure projects taken up by his Government will be ‘time-bound’.

“There are some long pending projects that were initiated by the previous governments without any vision. The Airport Road project should have been ready two years ago. Our Government gave orders to the BMP to complete the flyover as soon as possible. I have instructed Bangalore Mahanagara Palike (BMP) and BDA that the infrastructure development projects taken up by them should be completed within the given deadline,” Mr Kumaraswamy said.

Stressing on the role of residents in planning infrastructure projects, Mr Kumaraswamy said that authorities should focus on building confidence among the citizens and invite public participation.

Residents inputs

“When residents complain or make suggestions, the officials should consider their inputs with an open mind,” he added. Incidentally, there were several residents who participated in the inaugural event, but only to express their disappointment with the authorities, to the CM.

Even IT couldn’t save woeful Whitefield

2006-07-16T09:23:00.000-07:00

Even IT couldn’t save woeful Whitefield
The Times of india

Bangalore: Whitefield is facing a surfeit of civic problems — from poor lighting to encroachment. Most residents say that despite the presence of the biggest and most sophisticated IT unit in ITPL, the state of the roads leading to Whitefield have just not improved. “We have the best IT facility. But are the roads good enough?’’ asks Rahul, a resident.

Much of the Whitefield area which comes under Mahadevapura CMC does not have a quality road network despite the presence of many industries. Street lighting is also poor compounding the problem of bad roads, says Brigadier K K Sood.

Sood also points out that there is a serious water shortage in much of the CMC area. “So many of us have paid and continue to pay water cess. But where is the Cauvery water promised to us?’’ he asked adding that garbage dumping is a major problem with much of the brunt being taken by Varthur lake.

According to Mahadevapura CMC commissioner M A Baig, tenders have been invited to asphalt roads and the deposit paid to BWSSB to get connections. “Water pipelines are being laid. Work is going on and is time-bound. As for garbage, we have implemented door-to-door delivery for the last three months. The lake is also being cleaned.’’

Sood and some of his friends are also facing encroachment problems on their plots of land. The lands were purchased 15 years ago and have been registered as sites in square feet by the CMC though the land is recorded as guntas in village records.

The Cherry Dale Residents Association, whose members bought the land, say that a whole range of homes coming up next to the land is bringing a lot of construction garbage on to the plots.

“Construction material is being dumped on the plots. Despite lodging complaints with the authorities, no action has been taken,” says Harpreet Singh.
Is some parts of Cherry Dale area of Whitefield, illegal temporary slums have come up apart from the brick factory which is making its way to the place.

The problem of encroachment is widespread in Whitefield with many areas of Mahadevapura being occupied by people building houses or by construction material itself. “The first thing that comes to mind in Whitefield is sand, bricks and hutments. Wherever you go, construction is being carried out. Who will regulate what they do? Even ITPL has not made a difference,’’ says Sudheer, a resident.

CMC CHIEF SPEAKS

Wherever there is encroachment, our engineers have acted and levied fines. We have asked BCIL to put construction material on their own land. They have also told us they are not encroaching on Cherry Dale residents’ sites. But we will examine the situation and act accordingly. — M A Baig

THE PROBLEMS

Residents cite the following problems in Whitefield.

• Bad roads

• Poor lighting

• Haphazard dumping of construction materials

• Encroachment

• Water shortage

• Waste deposit

• Illegal slums

Newly-opened flyover comes a cropper

2006-07-16T09:17:00.000-07:00

Newly-opened flyover comes a cropper
Deccan Herald

It appears as though the solution itself ended up becoming the problem. A day after Bangaloreans were ‘gifted’ the Koramangala-Indiranagar link flyover on Airport Road, road users on Thursday had to put up with an even bigger traffic jam.

The areas around the newly-inaugurated flyover, including residential ones, were choked with traffic during peak hours, pushing people to take deviations or long detours to reach their destination. While on the one end, traffic from Koramangala piled up on the flyover itself, there was heavy congestion till the Indiranagar 12th Main junction located over 500 metres away from the flyover.

The reasons

First, the flyover road narrows down to half of its width at a junction on 100 Feet Road, Indiranagar, few metres away from the flyover. Traffic being allowed to move on all roads and the absence of traffic signals, only exacerbates the pell-mell.

Secondly, the right turns were closed on 100 Feet Road, making the traffic coming from Koramangala towards the airport, travel extra distances to take a U-turn. Many were forced to venture into residential lanes, triggering jams even there. Chandru, an auto driver, said several roads inside the residential layouts were dead-ends or were ‘no entry’, making it all the more difficult for vehicles to move about. “This is worse than what I have ever seen,” he said.

Deeptha, another road-user, felt the main flyover had failed to deliver what it had promised a few years ago. Deeptha said it took her 40 minutes, instead of the usual 10, to reach Domlur, from Defence Colony, Indiranagar, due to the choc-a-bloc traffic on 100 feet Road. “As the right turns on 100 Feet Road were closed, we were forced to go to Koramangala to reach Domlur. What a mess!,” she said.

However, all was calm at the Koramangala end. Sunil, a petty shop owner said there was no traffic congestion and movement of vehicles was smooth throughout the day.

Police reaction

Meanwhile, Deputy Commissioner of Police (Traffic-East) M A Saleem said the traffic department will study the traffic movement near the flyover for the next two to three days, before planning the future course of action. “We may have to introduce new medians and U-turns to streamline traffic flow. This will be done in the next one or two weeks,” he added.

Airport Road Flyover, Jayadeva underpass to be inaugurated soon

2006-07-03T08:16:00.000-07:00

Airport Road Flyover, Jayadeva underpass to be inaugurated soon

Work completed after a delay of almost two years

--------------------------------------------------------------------------------

Load tests on the Airport Road Flyover launched on Friday
Main Jayadeva Flyover inaugurated last year
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BANGALORE: After a delay of almost two years, both Airport Road Flyover and the road underpass at Jayadeva Flyover are almost complete and would be opened to the public shortly.

M.K. Shankaralinge Gowda, Commissioner of the Bangalore Development Authority, said the main carriageway of the airport road flyover would be opened to the public on July 8. On Friday, the BDA started load tests for the flyover. The complete Airport Road Flyover, with three loops, would be completed by September, Mr. Shankaralinge Gowda said. "Once traffic eases on the main road, we will start work on the loops. We will complete one each month," he added. The airport road flyover was envisioned in 1999.

The underpass and grade-level separator of Jayadeva Flyover would be opened on July 15, he said.

Bangalore to build five 'tech towns'

2006-07-03T08:14:00.000-07:00

Bangalore to build five 'tech towns'
And seeks foreign cash to do it...

Authorities in India's technology hub of Bangalore are wooing foreign capital to crank up its creaking infrastructure to help lure back Western businesses which are turning to other cities for outsourcing and IT services.

The government plans to build new elevated highways, widen existing roads, develop satellite towns and set up a $1.4bn mass transit system in the city, home to more than 1,500 technology companies.

But IT industry officials said on Friday the government needs to speed up the projects and plan many more initiatives to sustain growth in India's Silicon Valley.

Karnataka chief minister HD Kumaraswamy said: "We will encourage foreign investment in all areas of infrastructure building in and around Bangalore. Immediate approvals will be granted to all such investment proposals."

He said the state would issue a global tender next month to build five satellite townships in a radius of 30 miles of Bangalore, the capital of the southern Karnataka state.

But investors may be discouraged by an ongoing dispute between the state government and a consortium that is building an expressway from Bangalore to Mysore, 70 miles away.

The state government has accused the consortium of buying more land than necessary for the $600m project to build the road, industrial hubs and new townships.

Ashok Kheny, managing director of the Nandi Infrastructure Corridor Enterprise consortium, denied the allegation saying such controversy would be a setback for new private investment.

Bangalore boasts large facilities of global companies such as IBM, Intel and Microsoft but its rapid growth has led to traffic jams on potholed roads, overcrowded public transport and irregular power supply.

Rajendra Misra, managing director of private equity firm Tenet Holdings Private, said: "Bangalore, which is essentially a brand that has been created painfully in the last so many years, is fast disappearing."

Misra, a member of an official panel set up to improve the city, said authorities had ignored infrastructure for too long: "They [the government] are killing a golden goose."

Technology businesses, which have helped transform a tranquil city into a buzzing metropolis of 6.5 million people which makes up a third of India's $23bn software and back-office service industry, say Bangalore needs large investments.

Sunil Mehta, vice president of national IT body Nasscom said: "The new infrastructure initiatives will certainly help but we need many more projects like these."

Bangalore now competes with other Indian cities such as Hyderabad in the neighbouring state of Andhra Pradesh.

On Monday, the world's largest wealth manager, UBS AG, began back-office operations in Hyderabad, where Franklin Templeton is setting up a unit and Microsoft also has facilities.

Tata Consultancy Services, India's top software services exporter, said earlier this month it plans to invest 5 billion rupees ($108m) in a new software development centre in the western Indian city of Pune.

Industry officials say they are keenly watching the progress of other projects such as a new highway connecting the city to the Electronics City, which houses 150 companies including India's second-largest software services business, Infosys Technologies, and its smaller rival, Wipro.

Anant Koppar, president of MphasiS BFL's technologies division, said: "We are getting good signals from the government. We need to have good governance and good project management to see the faster implementation of all these projects."

Metro on CMH Road

2006-07-03T08:12:00.000-07:00

Members of CMH Road Traders Association in Indiranagar closed their shops for two hours on Monday demanding realignment of the Metro Rail.

The protesters, led by advocate and former MLA Pramila Nesargi, claimed that nearly 1,000 commercial establishments, including banks will have to close down if the Metro passes through the area.

They formed a human chain on the stretch, as part of the demonstration from 10.30 am to 12.30 pm. Traffic in the area was disrupted for some time. The association said 5,000 traders will lose their means of livelihood.

The members also said the government can save Rs 800 crore if they avoid CMH Road, which has too many bends. Nesargi, president of the association, said the alignment was not changed despite repeated protests.

They said the route can be realigned from Trinity Circle via Adarsha Theatre to Old Madras Road.

Airtel digs at Night

2006-07-01T20:15:00.000-07:00

Airtel has a good strategy. When you need a new connection, just call them and they will send their men (poor, starved laborers) to dig the roads to lay the cable. The Airtel laborers start digging only after the Sun sets.

Around 7PM , they start digging without approval from the BMP or other Bangalore government authorities. They ALWAYS dig in the dark. They should change their advertisement jingle to DIGGING IN THE DARK (sign up Bruce Springsteen of Dancing in the Dark, instead of AR Rehman)

Well, this seems to be their strategy nationwide and not just in Bangalore. Look here for Chennai residents note to the editor of The Hindu Consult TNEB, BSNL before digging.

Numerous calls and complaints to their customer care hotline does not help. Complaints to the BMP/BCC has helped, but the poor, starved laborers are arrested and harrased.

Will the Airtel diggers ever dare to dig during the day?

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All Booms Bust: Bangalore Real Estate

2006-06-11T00:14:00.000-07:00

Is Bangalore Real estate boom, a big bubble in the making?

This is a question haunting many for the past year or two. House prices are soaring, it is becoming increasingly unaffordable. World over the Real estate prices are soaring, rising interest rates, a declining property market and overly optimistic economic forecasts, this is a major cause for concern. One good clue is the amount of advertisements coming in Bangalore Classified sections of Bangalore news papers. Its the same Ad's we are seeing for months, some for years. Prices are changing and thats the only difference. Will there be a change? I may sound overly pessimistic, but the fact of the matter is that we maybe on a downhill ride here.

Western analysts say, All booms bust. And the trouble with the real estate bust is that [the] recession lasts twice as long as a stock market bust.

The man Fortune magazine says is "the best real estate investor on the planet today" is getting out of the U.S. real estate market - and is suggesting that others do the same."Greatest Real Estate Investor [Tom Barrack]: Bust Warning" : World's Best Real Estate Investor Warns of US Bubble

The June edition of 'The Economist' has an article:
Soaring house prices have given a huge boost to the world economy. What happens when they drop

Robert Kiyosaki says in a article ALL BOOMS BUST!Words of Caution from Robert Kiyosaki: Kiyosaki stressed that this is not the time for amateurs to be jumping in. He said that there are already too many idiots in the market asking ridiculous prices, so that few good deals are possible. He clearly implied that the real estate bubble is big.

Kiyosaki is not the only one capital insider who is expecting real estate bust. For example,
After Greenspan, a Major Recession.

Its not just the US real estate market which analysts predict will fall, but this will obviously have a cascading effect on the world economy. Don't forget the rising oil prices either. Bangalore has a real estate boom even though there is no such thing as planned infrastructure. We still have pathetic roads, and in some parts of Bangalore there WERE roads. We need to plan for today and tomorrow. Its no use having a quick-fix solution, what we need to a solution which will work 10 or 20 years down the line too. We need good Vision, not a temperory solution.

So, are we ready to face another challenge in Bangalore? A real estate bust? Well, in every adversity, there is the seed for an equivalent or greater benefit, so the eternal optimist would always say: In every real estate bust, there is a buying opportunity._

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Empire State Building's Viewing Gallery

2006-06-10T23:48:00.000-07:00

Did you know that the builder made this floor as the Viewing Gallery because he could not find anybody to rent this space. He could not find a tenant. :)

Shows you how Building Sky scrapers invites ruins.

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Big Buildings Can Mean Big Economic Disaster

2006-06-10T23:44:00.000-07:00

By Scott Pearson
AS BUILDERS BEGIN WORK ON THE FREEDOM TOWER in New York City, to be the world’s tallest building, economist Mark Thornton offers a history-based theory of the relation between super-buildings and the economy. Thornton surveyed economic performance worldwide following the completion of each of the world’s tallest skyscrapers, and suggests what these events foretell.

Thornton cites example after example to back up his theory. His conclusions may surprise readers, but are based on historical evidence. Thornton reports, “The announcement and groundbreaking for the world’s tallest building takes place at the end of a long boom or sustained bubble in the economy.” Generally, this is followed by a bear market for stocks, and an economy heading into “recession or worse”.

Lest we accept his reasoning without analysis, consider history. The Petronas Towers’ completion in Malaysia signaled the Asian Crisis, pushing markets worldwide into a tailspin. The World Trade Center, completed in 1973, and the record-breaking Sears Tower in 1974, led into the dismal 1970’s. The Great Depression was heralded by the Wall Street building in 1929, the Chrysler Building in 1930, and the Empire State Building in 1931. The 1913 completion of the 792 foot Woolworth Building foretold only a short downturn in that year, possibly cut short by WWI. As far back as the 1907 Panic, we can draw correlations to Singer’s building (finished, ‘08) and Met Life’s building (completed, 09).

One could question the validity of such indicators, just as one might question the “Super Bowl indicator” or other spurious forecasts. But, Thornton makes a good case for why these connections make sense: “Long periods of easy credit create economic booms, particularly in investment, speculation becomes pronounced, and entrepreneurs lose their compass of economic rationality and make big mistakes. The biggest mistakes – record-setting skyscrapers – come toward the end of the long boom and signal the bust.”

Even Thornton points out that no such indicator can be foolproof, and we point out that some of these buildings were completed after a downturn, not before. One could say that this building may correlate to the recent dismal economy. But it is wise to consider the possibility that the future may also look bleaker than many in the mainstream media want to admit. Knowing what to expect is core to sound investment strategy. As we’ve suggested, the present is remarkably difficult to precisely assess. Policies and events represent such a departure from the recent past that normal prediction techniques become largely useless.

The sad thing is that most analysts and forecasters have ignored the uniqueness of today’s economy, and continue to base statements and predictions on mismatched methodologies. We’re not suggesting that economic law has changed: what has been true remains.. However many analysts assume that today is a carbon copy of the glorious 80’s and 90’s. In fact, today more closely resembles the 70’s, when fear of international war and terrorism dominated, and inflation was of great concern to those who intended to save and invest (and great skyscrapers were being built).

The mainstream blindness is best illustrated by recalling the belief among members of the investment community and economic policy-makers that we were heading toward a period of deflation. Of course, deflation of any size hasn’t been seen in the U.S. since the Great Depression, but their indicators led them to conclude that we were heading there. They advocated a more inflationary policy on the part of the government and proposed a Keynesian spending spree.

We would dispute their analysis. We never saw any real deflation, and now, as we’ve been saying all along, real concerns about inflation are beginning to become realistic. Indeed, it is an election year. History demonstrates that incumbent administrations always follow an inflationary policy in the run-up to the election, printing and spending money to create an exaggerated impression of a good economy. This has been shown to boost re-elections, but also carries with it an inflationary punch that is often seen in the following year(s).

Understanding this simple reality steers us toward intelligent investment decisions. There is clear anticipation of inflation, and rising interest rates, which we are already seeing.

Observing these factors should help us to select investments that will perform well in the coming economy.

We have said that the economy looks strong for the remainder of this year, but as inflation and rising interest rates build next year, a potential for the type of “stagflation” we saw way back under Gerald Ford seems possible.

The market may be beginning to take this potential into account, which explains the downtrend over the past month. Possibly, this fall is the result of terrorism fears that have been drastically overplayed in the media. Terrorism is always a threat, but the idea that we’re currently facing a dramatically increased threat is pure election year gamesmanship. Yet, people seem to buy into much of this, and the market follows popular sentiment. Most likely, the recent market drop may simply be a result of earnings disappointments. Most recently, earnings reports have been anything but upbeat, with many companies reporting unexciting results.

With bad earnings already beginning to hit, future economic troubles seem even more ominous. We’ve been saying all along that the current year should produce good results, but the future was uncertain. We now say that the future is beginning to look less exciting, and may hit sooner than anticipated. This suggests a more defensive strategy.

A defensive strategy is a two-part approach. First, it requires us to get our personal finances in order. This is no time to be carrying unnecessary debt. In the same way, it may be wise to delay those new car loans and leases. Make sure expenses are in tune with income levels, and that ample savings are being put aside as part of the mix. If the future economy is weak, income levels may be constrained, and preparing for the worst is vital. Overlooking this component can make all our good investment choices meaningless.

We mustn’t focus only on the downside of the weak economy. Wise investors will look in three different directions for investment success. First, anytime an economy faces weakness, we know to consider stocks that are considered “defensive” – those which will not experience serious downturns from a poor economy. These stocks often pay dividends, which helps to stabilize the share price. This includes food, drug, alcohol, tobacco, and utility firms. Such companies may experience modest downturns in a weak economy, but people still need to eat, still need to use electricity, and still take drugs needed to maintain their well-being. Thus, these stocks generally experience less pressure than other types of firms.

We might choose to delay buying a new car in a weak economy, but we won’t really delay buying necessities.

A second type of stocks to consider in an economic downturn may be surprising to some - turnarounds. We’ve found that times like these may create good opportunities to buy troubled companies. One would think that such “bottomfishing” would be risky in a weak economy, but this is the time when stocks tend to get hit hard when they report weaker than expected results. This creates great buys. Already, we are beginning to see select technology companies selling below book value while maintaining profitability. In a weak economy, such opportunities present themselves, and the upside potential is great. We expect more of these opportunities next year, but some are already beginning to become available. This type of equity can’t be expected to provide immediate results. Often they take months or years to turn fully around, so a great deal of patience is required. A different level of investing discipline will be required in these times.

Finally, in an inflationary economy, commodity goods can provide good gains. Thus, stocks such as gold and other mining stocks, oil producers, timber producers, and other natural resource developers may hold promise. While we are inclined to like these stocks generally, many of them have already risen to levels that seem pricey. Overpaying for stocks in this kind of market may prove to be a big mistake, so we’re forced to be patient and seek out the few good opportunities in this sector.

Investing in the coming period will not be simple. But opportunities will continue to exist. In such times, selecting stocks carefully and maintaining discipline will be the keys to success.

Is mkt meltdown reducing realty rates?

2006-06-10T23:32:00.001-07:00

www.economictimes.com

NEW DELHI: After the stock market, it is the turn of real estate to turn south. Though none of the developers who ET spoke to across the country are ready to admit it, there is, in fact, a 10% to 12% dip in realty prices.

The developers, however, concede that the market has shown a slowdown in the last four to six weeks. The number of deals have been few and isolated with barely any property changing hands. Notably, the slowdown is confined to the residential sector and not to commercial or retail sectors.

According to a leading developer: ”The correction in the market is likely to affect realty prices across the country, especially in the residential sector. Land prices in few markets are also likely to see a downward correction. This, combined with rising interest rates, could actually push the market to a situation where transactions over the next three to six months will decrease.”

Agrees SK Sayal, CEO, Alpha G:Corp: ”In the short term, the real estate market would in all likelihood see a correction of 15% to 20%. In the long-term, however, real estate will continue its steady ascent. For developers, a filtration process has already begun and only those who have the best fit in terms of quality, delivery and asset management will be able to meet the soaring expectations of a well-informed market.”

The recent erratic behaviour of the stock market has taken its toll on the realty market. There has been a slow down in the residential market across the country. Experts feel that there is a correlation between both the markets.

Says Anuj Puri MD, Trammell Crow Meghraj: “There is a correlation but only peripherally. There is usually a 6 to 8 month lag between stock market fluctuations and corresponding effects on the real estate market. And yes, a correction is definitely on the anvil – but it will stay true to this buffer period, and will not be dramatic or immediately manifested.”

Another reason being cited for the slowdown in the residential sector is the hike in home loan interest rates. The hardening in prices coupled with increased interest rates is making it less attractive for buyers. As a consequence demand for rental space has increased and this has resulted in a rise in residential rental values.

So far, the real estate industry has been growing at the rate of 30-40%, with last year being a landmark year as property prices witnessed record highs. Some markets have shown explosive growth due to demand from IT services and BPO companies.

Says Rothas Goel, CMD, Omaxe Group: “There is big real estate boom happening all over the country. The land prices have appreciated in a big way in last couple of years. Though there is no correction as such, we feel this is a temporary phase and the year 2006 will actually be even better than last year for the growth of the real estate sector.”

The correction could also be because of the frenzy in the real estate sector which is high as returns currently exceed most other investment areas. Yields on commercial real estate across metros in India are higher than those of many global real estate markets.

Moreover, with more than Rs 20,000 crore worth of IPOs being planned by big realty groups, if both the stock and realty market continue on a downward spiral there could be trouble brewing. In fact, most realty groups are, at the moment, in a huddle with their financial advisors figuring out the best time to launch the public issues.

Obviously, these IPOs will result in greater capital supply to the real estate market. Developers will have access to more liquidity, which will be channelled into the project development. Investors too, will have a wider base of operation on the stock market, and end users will have more projects to choose from.

Property market cools down

2006-06-10T23:27:00.000-07:00

www.moneycontrol.com

Whitefield, Bangalore's largest tech belt is now witnessing a softening of prices as well as demand, both in the residential and commercial property markets. Consultants say that office space as of today is in an excess of 2 million sq feet. Builders had gone into a frenzy to develop commercial space, but the actual demand for non-grade A1 offices fell short.

The outcome - commercial property prices have fallen by 30% and are at Rs 27-30 per sq foot now as compared to Rs 35 -40 per sq foot six months back. On the residential front as well supply has gone overboard by 40% resulting in a drop in prices. Rates are now between Rs 2400 - 2700 per sq foot as compared to the Rs 3000 per sq foot level 4-6 months back.

Logistics has also been a major problem. Congested roads, high rentals and demand for larger floor plates are among the main impediments. Mainly IT companies are now looking at North Bangalore and there has been quite a percentage shift there, says Mahesh Laxman, Associate Director of Trammell Crow Meghraj.

Apartments in the North Bangalore stretch from Hebbal to Devanahalli can be bought for Rs 1800-2500 per sq foot. Office space is available at Rs 25-30 per sq foot per month. In the meanwhile, Whitefield's property market is expected to remain stagnant over the medium term.

Investing in India:Monster Profits Ahead from the Newest Pacific Tiger

2006-06-05T09:59:00.000-07:00

Investing in India:Monster Profits Ahead from the Newest Pacific Tiger.

Investing in India and its roaring economy should be on the front burner for anyone interested in creating real wealth for the second half of the decade.Go here now.

A few savvy investors saw this one coming-the bull market in India. And have made some monster profits over the past year.

While the Indian market has experienced a short-term correction recently, we feel this locked-in profit trend will be in place for at least the rest of the decade.
During the third quarter of 2005, The Economic Times reported that at the time, a whopping 118 Indian companies had earned more in the prior three months than them had during the entire previous year.

Many Indian companies have seen their bottom lines rise to such an extent that they have surpassed the net profit for the last full year in just three months of the current fiscal year. Over 100 companies found a place in this list of outperformers.
Get the complete list of top five Indian companies. Go here now.
Not only has that trend continued through mid-2006-it has accelerated into a higher gear.
In fact, the Indian stock market is up 200% over the past five years, compared with 65% in China and 11% in the U.S.

Recently, Financial Intelligence Report met with chief economist for the Asia region at a major Swiss Bank. He's based in Hong Kong but we cannot reveal his name or his bank's name, but you would recognize it immediately.

He told us that the two best investments you can make in Asia today are in the Indian market and, secondly, in the Japanese yen.

Our inside contact says the yen, which as underperformed for years, is still cheap. But he also says that India is a much better investment at this time than China.
Get our latest strategies on the Japanese Yen and the top Indian investments in our latest issue. Go here now.

7 Reasons Why India Should Be a "Must-Own" Part of Your Portfolio

Here are 7 reasons why India should find its way into your portfolio. The sooner the better!

A Booming Economy: Economic growth is estimated to be 8.1%in 2006.
Industrial Production is Way Up: India's Quick Estimates of Index of Industrial Production in January 2006 grew to 273.3; an 8.3% increase compared to January 2005.

Foreign Investment is Skyrocketing: Global investors are flocking to India, with foreign direct investments flows reaching a high of $647.7 million in January 2006, compared to $152 million a year earlier.

The Stock Market is Climbing: India's benchmark Sensex stock index hurled the 11,000 barrier, reaching a record high on March 21, 2006. While past performance is not always the best indicator, it does show that early investments in India are paying off for investors outpacing returns in Mexico, Brazil, and Kuwait.

Inflation is Down: Inflation , as measured by the Wholesale Price Index fell to 4.1% as of Feb. 4, 2006, compared to 5% in February 2005.

English Speaking: Most people in India speak English giving it a tremendous advantage over China and other emerging Asian economies.

Well Educated Workforce: India now produces over 3 million college graduates each year-a number expected to double by 2010

All of these advantages-plus the fact that many Indian employees will accept as little as 0ne-tenth the wages paid to U.S. workers-explain why corporate giants like GE, Intel, Texas Instruments, IBM, Electronic Data Systems, Microsoft, Cummins and PeopleSoft are outsourcing technical support, programming, design and other high-tech work to India.

Our inside contact at the Swiss bank also noted that India more closely adheres to Western accounting standards, whereas China's bookkeeping methods are notoriously unreliable.

We believe that India offers investors better long-term prospects than China. For a complete list of our top Indian funds, stocks and ADRs to buy now follow this link

The Real Estate Bubble Fact Sheet

2006-05-27T21:47:00.000-07:00

BY DEAN BAKER

1. The unprecedented rise in house prices has dangerous implications for the economy.

The generalized bubble in housing prices is comparable to the bubble in stock prices in the late 1990s. The eventual collapse of the housing bubble will have an even larger impact than the collapse of the stock bubble, since housing wealth is far more evenly distributed than stock wealth.

2. The housing bubble has created more than $5 trillion in bubble wealth, the equivalent of $70,000 per average family of four.

Through the post-war period 1950 to 1995, house prices grew at approximately the same rate as the prices of other goods and services, like cars, gas, and healthcare. Since 1996, however, house prices have risen by more than 45 percent after adjusting for inflation. This unprecedented run-up in house prices has generated more than $5 trillion in housing bubble wealth, which is the difference between the current market value of housing and the value if house prices had followed their historic trend and kept pace with inflation.

3. The increase in house prices is not being driven by fundamental factors in the housing market, such as income and population growth.

The increase in home prices cannot be explained by fundamental factors, such as rising incomes and population growth. The growth in income over this period has not been especially rapid. The rate of income growth is considerably slower than in the years from 1950 to 1973, when the rise in home prices just kept pace with the overall rate of inflation. The growth in population over this period has not been especially rapid. The most rapid growth in the number of new households actually took place in the 1970s and early 1980s, when the huge baby boom cohort was first forming their own households

Most importantly, there has been no significant increase in rents, which would be expected if the run-up in house prices were explained by the fundamentals of the housing market. Rents and home sale prices have always moved closely together, since families can freely switch between renting and owning depending on the relative prices, and landlords can sell off rental property if
home sale prices rise substantially relative to rents. Rents had increased somewhat more rapidly than the overall rate of inflation from 1998 to 2002, but actually have been falling behind inflation in the last two years. This indicates that the run-up in house prices is not being driven by fundamental factors in the housing market.

4. The housing bubble regions are large enough to have a major impact on the national economy.

There are many areas of the country in which house prices have not diverged far from their historic patterns, increasing only slightly more than the overall rate of inflation. However, the bubble regions -- some of which have seen home prices increase more than 60 percent after adjusting for inflation -- are large enough to have a major impact on the national economy. These regions include most of the East Coast north of and including Washington, DC, especially New England; much of the Pacific Coast region; and many pockets in between. Not all of the run-up in prices in these regions will necessarily be reversed in the downturn (there are reasons why these areas have become more attractive places to live), but most of the run-up in house prices will likely be reversed in most areas. The bubble areas are far too large to be explained merely by the fact that they have become more attractive relative to other regions.

In assessing whether house prices in a particular area make sense, it is useful to think of higher-than-average house prices as comparable to a tax. Cities like San Francisco, Los Angeles and New York City have features that make them more desirable than other places, so people are willing to pay a premium to live there. However, there is a limit to how much people will pay.
Housing costs comprise approximately 30 percent of the average family's spending. So if house prices are twice as high in bubble areas as in the rest of the country, it is equivalent to a tax of 30 percent on residents of these regions. If house prices go even higher in these areas, then the effective tax rate becomes even higher.

At some point, the economies of these bubble regions will not work -- the
rest of the country and the world will pay no more for the legal services,
financial services, apparel, or whatever else is produced in these areas than it
will for the same items produced in Peoria, Illinois or Bangalore, India. House
prices that are too disproportionate with the prices elsewhere will simply
make the economies in the bubble areas uncompetitive, leading these regional
economies to contract until house prices fall back to a level where these
regions can again be competitive in a national and world market

5. The collapse of the housing bubble will throw the
economy into a recession, and quite likely a severe recession.
Housing construction is equal to approximately 5 percent of GDP.
Construction of new homes has been going on at a near-record pace over the
last few years, in response to the run-up in housing prices. Home
construction could easily fall back 40 percent (this was the drop off in the
1981-82 recession), which would imply a direct loss in demand equal to 2
percentage points of GDP.

In addition, the large wealth effect associated with the housing bubble, which
has spurred a consumption boom in the last few years, will go into reverse as
housing prices plummet. Research from the Federal Reserve Board shows that
a dollar in additional housing wealth leads to 4 to 6 cents of annual
consumption. This implies that a loss of $5 trillion in housing wealth would
lead to a decline in annual consumption of between $200 billion and $300
billion. This loss in consumption is equivalent to 1.6 to 2.5 percentage points
of GDP.

Combining the 2 percentage point drop in demand due to a falloff in housing
construction with the 1.6 to 2.5 percentage point drop in demand due to the
reversal of the housing bubble's wealth effect leads to a falloff in demand of
between 3.6 and 4.5 percentage points of GDP. If employment fell in the
same proportion, this would imply the loss of between 5.0 million and 6.3
million jobs. Since the federal government is already running a large deficit,
and the country is running a very large trade deficit, the government's ability
to use fiscal and monetary policy to boost the economy out of the recession
will be severely restricted.

6. The collapse of the housing bubble is likely to put major
strains on the financial system and require a federal bailout
of the mortgage market.
The collapse of the housing bubble is likely to lead to record levels of
mortgage defaults. The ratio of home equity to home value stands at near-
record lows, even though the run-up in home prices translates directly into
additional equity. The reason for the low ratio of equity to value is that many
homeowners have been quick to borrow against the new equity created by the
housing bubble. This means that when home prices fall, many homeowners
will find that their mortgages equal or exceed the value of their house, giving
them a strong incentive to default on their mortgage and simply turn over
their house to the mortgage holder

Of course, if the economy is in a recession, then many homeowners will have
no choice but to default on their mortgages. Rising house prices have led many
homebuyers to stretch themselves as far as possible to be able to afford
monthly mortgage payments. Losing a job or being forced to take a new job at
lower pay will leave many recent homebuyers unable to make their payments.
Similarly, if interest rates rise, as virtually all economists expect, homebuyers
with adjustable rate mortgages will find themselves paying much more on their
monthly mortgages. Many homeowners will be unable to make these higher
payments.

If there is a large increase in the rate of mortgage defaults, then the mortgage
holders will experience big losses. While many banks and financial institutions
still hold large amounts of mortgage debt, most mortgages become the basis
for mortgage-backed securities, a market that now exceeds $6 trillion. This
market will be put in danger by a large wave of defaults following the collapse
of the housing bubble. It is likely that the federal government will have to bail
out the market in mortgage-backed securities to prevent a cascading series of
defaults.

7. The sooner house prices drop, the less economic damage
there will be.
Given how far out of line house prices have grown from fundamentals, there
is no way to avoid enormous economic damage when the bubble collapses.
However, the quicker house prices revert to more normal levels, the less
damage there will be.
As long as prices remain high, more people will buy into homes at bubble-
inflated prices. Every week, approximately 140,000 families across the country
buy a house. Most of these home purchases occur in the bubble regions.
Homeowners who see the price of their home soar in the bubble and then fall
back in the crash are not harmed (although they may be unhappy that they
didn't sell at the peak). On the other hand, people who buy a home at a
bubble-inflated price - and then see the price plummet in the crash - may lose
much or all of their savings. The sooner the bubble bursts, the fewer the
number of people who will be in this situation.
In addition, if people are borrowing against the bubble-inflated value of their
homes, they may come to regret the level of debt they have acquired once they
realize that the equity in their home is less than they thought. The baby boom
cohort, currently ages 41 to 59, is nearing retirement. Many baby boomers
have done very little saving because they believe that they have a large amount
of equity in their home. The sooner the bubble bursts, the less borrowing will
occur, leaving people better prepared to pay for their retirements

Also, the longer the bubble persists the greater the number of questionable
mortgage loans. The future rate of mortgage defaults will be higher the
longer it takes to burst the bubble. For these reasons, and others, it would be
better for the economy if house prices adjusted quickly to more normal
levels.

8. The housing bubble could pop from higher interest rates,
but it could also deflate even if interest rates stay low.
The fact that mortgage rates fell to a fifty-year low, and have stayed low, has
been an important factor in propelling the bubble. The low mortgage
interest rates of 2003 were largely the result of deliberate action by the
Federal Reserve Board to prop up the economy in the wake of the stock
market crash. However, mortgage rates have remained low, even as Alan
Greenspan has raised interest rates, primarily because the Japanese and
Chinese central banks have intervened in the U.S. treasury market to offset
the Fed's actions. By purchasing hundreds of billions of dollars worth of
long-term bonds, these central banks have completely offset the Fed's
efforts to affect the mortgage market. If the Japanese and Chinese central
banks reduce their intervention, or other factors put substantial upward
pressure on long-term interest rates, then the housing bubble is likely to
unwind.

However, the bubble could begin to deflate even if interest rates do not rise
appreciably. The economy is building over 2 million new housing units
annually. The demand for housing from new households or second home
purchases is probably in the neighborhood of 1.5 million a year. As long as
house prices remain at their bubble-inflated levels, construction will stay at
its current level or possibly even increase. At the moment, the excess supply
of housing is being absorbed by speculators who are convinced that the
prices will rise in the future and also by a record nationwide rental vacancy
rate. Both sources of demand are limited. There is a limit to the number of
people who are willing to speculate in real estate. Also, as excess rental
capacity develops, it will put more downward pressure on rental prices,
leading more potential homebuyers to rent and causing many landlords to
sell off rental units.

It is impossible to say what set of events will cause housing prices to turn
(in the absence of a rise in mortgage interest rates), just as it was impossible
to determine the set of events that finally led to the bursting of the stock
bubble in 2000. However, with supply persistently outstripping demand, it is
only a matter of time before house prices eventually adjust

Bangalore on Yahoo Messenger

2006-05-06T07:29:00.000-07:00

Hyderabad Stinks

2006-04-22T02:26:00.000-07:00

IT STINKS: Sewage overflowing on to the road in the Happy Homes Colony near Upparpally crossroads.

HYDERABAD, MARCH 29. Irony with a tinge of bitterness marks the Happy Homes Housing Colony in the Rajendranagar Municipality. The residents here, Ward No. 36 of the municipality, are an unhappy lot.

The problems of Happy Homes - drinking water shortage, absence of drainage systems, defunct streetlights and roads inundated with sewage - are nothing rare. What gives them the sting is the sustained indifference of authorities to numerous complaints from residents.

The list of authorities and VIPs approached by residents starts with the entire top brass of the municipality, goes on to their elected representative - the Mines and Geology Minister, the Municipal Administration Minister and his top officials, the Chief Minister, the Lok Sabha and Rajya Sabha members and even the Congress president.

"Nobody has responded to the memoranda or e-mails we sent in the last three years," says T.R. Madhavan, joint secretary of the Happy Homes Housing Residents' Welfare Association.

Now the problems. Residents claim that they, through the builder, had paid everything that was necessary to get approval for the layouts from the Hyderabad Urban Development Authority. Still, inner roads, drainage, streetlights and individual water connections among other basic amenities remain a dream.

"The Fire Services Department, after inspection of our apartments, directed the municipality not to issue occupancy certificates because fire safety requirements were not met.

How did HUDA then approve the housing layouts and apartments?" asks Mr. Madhavan.

Drinking water used to come via municipality tankers till February. That stopped with officials reportedly saying that the apartments won't be supplied water without separate payment.

The drainage problem is what welcomes visitors here. With no drains to carry the sewage to the Musi, the filth overflows onto the road and into the nearby Fort View Colony. Further, in spite of a school and hospital in the region, there is no traffic signal at the Upparpally crossroads from where the road to the colony begins. The absence of zebra crossings makes the situation dangerous for schoolchildren, thanks to the non-stop racing traffic along the ring road.

And they call it Happy Homes Colony!

First Hyderabad Visit: Part I

2006-04-22T02:08:00.000-07:00

There it was...my first ever visit to the Hitech city of Hyderabad.

It was HOT and Humid, started to miss bangalore already.

The HussainSagar Lake stinked like crazy. There was a Buddha statue in the lake and there were boat rides to the statue. I refused to go through that ordeal of surviving the boat ride on this lake which had more of sewage than water. I can bet, if the Buddha comes alive, he will die of suffocation because this "Lake" smells so bad.

The roads are wide and good, but the traffic is horrible. Its as good as Bangalore. with people being so time sensitive at traffic lights. Drivers breaking all the laws in the book.

There was this famous I-Max multiplex, it was good but again, there was a catch.
The escalators lead you up till the top floor, but there are no escalators going down. This really took me by surprise. There were stairs to go down, thank god, the people who own that atleast built stairs and not hung a rope for us to climb down.

I am yet to visit the Hi-Tech City part of hyderabad Hope that has some promise.

I am beginning to feel like its Hype-rabad and not Hyderabad and whoever called it Cyberabad has gotta see a doctor.

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