Cranes In The Sky

There’s an old adage in the markets called ‘Seven Cranes in the Sky’.

Very simply, this maxim implies that whenever you can see seven cranes in the sky, business is booming. But right now it looks more like seven cranes per suburb – they’re everywhere! It’s as if they were last year’s Christmas present.

The seven cranes theory gives an insight into the health of an economy. It helps measure the demand for building materials, finance, professional services, home wares, infrastructure, etc. Employment increases, we spend more, and around the circular flow of income goes and grows. Happy days!

The only downside to the seven cranes theory is it’s cyclical. Eventually those cranes must come down because building slows.

Testament to this theory is the performance of building stocks such as Boral, Pioneer and CSR. Like their cranes, they peak and then pull back. They never seem to take off and grow like consumer based stocks such as banking and retail stocks.

There is no doubt the army of cranes in the sky right now are supported by very low interest rates. Buyer demand has been met by swarms of developers taking advantage of all the very cheap money swashing around at the moment.

So how long will it last?

Leading economic forecaster, BIS Shrapnel, released a report this week saying, “…developers have been playing catch-up after a decade of undersupply in Sydney, but they look like soon getting ahead of themselves”. Said senior manager of residential property Angie Zigomanis.

He continued, “…we expect unit output to peak in 2016-2017 and once the market starts getting into oversupply then rents either flatten out or start falling…this has the potential to also coincide with the Reserve Bank tightening interest rate policy as well”.

“I wouldn’t be surprised if from there, purchasers don’t experience losses of perhaps 5 per cent and … up to 10 per cent”. He added.

There are three important points to come out of this report
• Be very careful about buying anything off the plan right now
• Buyers have continued to price property as if interest rates will never go up again
• Regardless of the market, supply always catches up to demand. Its a basic universal law of economics and it never fails.

If you are worried you have missed this property boom, don’t fret. I wouldn’t mind betting you buy off a very distressed seller in the next couple of years, at a good price.

Just keep an eye on the number of cranes in the sky.