EKIP– Expert Club for Economics and Politics A Different Opinion
Following the first part of the series on the link between tall building construction and impending economic collapses, Kalin Mikov takes the theory behind this relationship and applies it to Bulgaria. If you haven't read the previous part, do so HERE.
Given that there is still no completed building that exceeds the 104 meters of Hotel Rodina in Sofia, it is a bit strange to talk about skyscrapers in Bulgaria. However, it is useful to look at some data from the years of the construction boom and check whether the index predicted the collapse in this sector. Since the BNB is (fortunately) deprived of the prerogative to manipulate the monetary system itself, we follow the development of the ECB's general interest rate (GIR):
From 2001 to 2003, the GDP growth rate fell sharply from 4.75 to 2%, remaining at that level until the end of 2005, when it began to gradually increase. This episode of credit expansion coincided with a sharp increase in the average price per square meter of residential space in Bulgaria:
Even if we assume that a certain price increase is justified in terms of the general economic upswing resulting from the relative liberalization and stabilization of the currency, as well as internal migration to the big cities, a jump of more than 140% (from 318.3 to 769.7) in 4 years is at least suspicious. Having developed its dynamics, the boom continued until 2008 when the ECB's BPL returned close to the levels before this expansionary period. At the same time, retail sales showed a similar sharp increase:
The data show a typical example of a combination of too much investment in one sector and simultaneous overconsumption, financed by credit expansion. The tightening of credit only reveals the unsustainability of this process, and is not the cause of the crisis. The crisis is actually a recovery process, bringing the production structure closer to consumer desires and objective possibilities.
During the boom years, several skyscraper projects were presented in Bulgaria, which were fortunately terminated before more resources could be irretrievably lost. In 2007, for example, the Düsseldorf architectural office HPP GmbH + Co. KG won an international competition to design the tall body in the Europe Park Sofia complex, with a total built-up area of 69,000 m 2 and a tower height of 209.5 m. A diagram comparing the project with existing buildings shows its gigantic scale:
The skyscraper was conceived for the intersection of Tsar Boris III and Acad. Ivan Ev. Geshov boulevards, with work on the site starting in the summer of 2008 (when prices per square meter were at their highest), but was suspended about a year later. The project fits quite well into the index because it was announced at a time when issued permits were reaching their peak, i.e. at the height of the investment euphoria.
Work on it still begins despite the rising financing costs, because the developer expects to recoup his investment with the still high prices per square meter. When they also fall, the project is abandoned.
The index is of course far from perfect, as it does not predict all serious recessions, and the construction of the tallest building (to date) in 1913 was not followed by a collapse. In the Bulgarian case, we should also mention that there are projects such as Capital Fort and Millennium Center, started after 2008, which will exceed the 104 meters of the Rodina Hotel, although not as dramatically as Europe Park. The important thing in this case is to understand the causal relationship between monetary expansion and the eternal growth cycle – a crisis that can find expression in all kinds of bubbles, including real estate. There is nothing natural in such phenomena that we can define as the result of voluntary transactions between acting individuals. Credit excesses are possible only because of the system of fractional banking and central banks that create money out of thin air and distort interest rates.
