Why Shiny New Tall Buildings Could Signal a Recession

It’s not hard to see why Australia’s GDP numbers keeping rolling and surprising everyone on the upside lately. There’s enough building going on.

News came this week that Cbus Property, for example, finally got planning approval for its coveted site at 447 Collins Street in the Melbourne CBD. The prospect is for a $1.3 billion project that includes offices, residential homes and hotels, plus retail space. It’s another big project to add to a long list happening around the country.

Not only that, but the Australian Financial Review reported yesterday that the number of cranes in use around Australia has jumped 20%. That’s from six months earlier to the end of March.

A forest of cranes

Of courses, it’s the Eastern capital cities that dominate this trend. Most of these cranes are being used to build high rise housing in Melbourne, Sydney and Brisbane.

One thing that jumped out at me in the AFR article was this:

The current forest of cranes is the result of approvals passed up to three years ago, indicating that large numbers of housing-dedicated cranes will stay on the horizon well into next year.’
It seems obvious to point out that projects have a major time lag between approval and financing to development and completion.

Certainly all these buildings that are going up keeps people employed and the associated companies busy.

There’s an interesting study to be done on all this. In fact, studies have been done in this. That’s because history shows tall buildings (or the biggest, grandest buildings) often open in a downturn.

The danger to the economy is usually not while they’re being built, but once they’re finished. Here’s why: the credit and construction expansion that boosts the economy happens before they’re completed.

Here’s also what you need to know about this. There are a large number of projects due to open in Australia – indeed around the world – in 2019.

This is one reason we’ve pegged this date over at Cycles, Trends and Forecasts for Australia’s next recession.

I see it all the time. Just this week I ran across the following report in the Australian Financial Review

Adelaide joined the apartment frenzy that has gripped Australia on Thursday when Chinese property group Zhengtang broke ground at its 560-apartment project in West Franklin. 

The central business district’s largest residential project on the corner of Franklin and Morphett streets will be completed by 2019.’

Of course, you only know to look for such a thing after someone’s pointed it out to you. Phillip J Anderson was the one who showed me the way on that one.

Like a lot of his work, actually, it seems blindingly obvious once you see it. That doesn’t excuse the fact most everyone — myself included — completely miss it before he highlights it for you.

Anyway, the development happening around Australia should keep our economy ticking over nicely.

Australia isn’t alone here. Construction in New York City, for example, is expected to exceed US$40 billion this year for the first time ever.

But what’s happening in the ‘real’ economy doesn’t always translate to the stock market. As you can see with what’s happened in the markets this week. They can go their own way at times.

I know your regular editor Kris has been sounding the warning on a major crash possibility when it comes to stocks.

He’s not alone in his worry. The Wall Street Journal reported on March 27 that,

Some investors are so worried stocks will tumble that they are willing to lose money to protect themselves.

 Investors poured a record sum over the past month into exchange-traded funds whose value increases along with Wall Street’s so-called fear gauge, the CBOE Volatility Index.’

It’s always good to hear different viewpoints in the market. I asked Phil Anderson for his take on this. He told me,

‘Yes many people are worried about a crash…what you’ll see is they hedge or buy insurance for their positions.

 ‘What this means to me — as you know — is that a crash simply cannot happen whilst they act to mitigate it.

 ‘This is the psychology of markets. Take a look at the ‘record sums’ the Wall Street Journal mentioned from that article in March. What did the Dow Jones do this past month in the US — it went back to near all time highs.

To me this suggests a major crash isn’t on the cards. But the stock market is going to be volatile this year and we will get a major low at some point. That will spook everyone, no doubt.’

Phil’s been successfully navigating the stock markets for 30 years now. So successfully, in fact, that he ‘retired’ 15 years ago. Before his 40th birthday.

We’re lucky to have him on our team here at Port Phillip Publishing. And it’s been a real eye-opener working with him on Cycles, Trends and Forecasts, along with our expert chartist Terence Duffy.

If you want to learn Phil’s secret to unlocking the market’s movements before they happen – and you’re a Money Morning subscriber, keep an eye on your inbox later today.

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Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

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