Do petroleum prices influence property costs?

March 28, 2016

The prices of oil and property may not be directly connected, but property prices could be still affected by the economical effect of falling oil prices.

Petroleum costs are always in the headlines. While other states have seen costs of fuel and oil -based products go down, costs in Singapore stay high. Alfred Chia explains how oil costs and property costs are joined.

Dropping oil prices have really been in the news for the last six months, and property costs will also be on the decline. Is there a link between the two?

Before we can understand petroleum prices, we have to first recognize how they can be computed. Generally speaking, when we talk about oil prices, we’re referring to the costs of Brent crude, a particular grade of oil pulled in the North Sea.

Figure 1 compares Brent oil prices with housing costs that are worldwide. Global housing costs are based on the Global Housing Price Index from the International Monetary Fund (IMF), which can be an aggregate of actual (i.e., inflation adjusted) house prices across countries.

At first, there appears to be little correlation between both of these asset groups. From 2005 to 2007, both assets appreciated as there is an overall international economic boom which pushed up prices of most asset classes, including bonds, equities and commodities.

Nevertheless, alongside the international ecoomy, petroleum prices recovered from 2009 onwards before dropping due to production outpacing international demand in mid 2014. International property costs failed to follow the oil price trend, demonstrating little correlation between both of these asset categories.

On a worldwide level at least, we don’t see a correlation between housing prices and oil prices.

Nonetheless, oil price movements happen to be more volatile, especially since June 2014, when it began to dive dramatically.

Though it’s on a downwards trend, the price index of uRA remains comparatively stable. Just like housing prices that are worldwide, there seems to be little correlation between Singapore property costs as well as the costs of petroleum.

However, while oil prices aren’t strongly correlated with property prices, it is an essential commodity that paints a picture of the worldwide economy, and could have an indirect impact on housing costs.

The most talked about reason for this extreme fall is overproduction and overcapacity since the beginning of 2014. Nevertheless, apart from supply side reasons, prices are additionally affected by international demand with this commodity. A world-wide economic slow down decreases the need for oil and areas downward pressure on costs. Given both supply- and demand-side pressures on the prices of petroleum, it’s no surprise that prices have dropped as sharply and quickly as Gem Residences they’ve, placing budgetary pressures on economies that rely strongly on income.

Now, with all the world confronting an international economy slowdown, especially in China, the International Energy Agency (IEA) has forecasted that global need for oil will drop in 2016. In the short run, low oil prices will put pressures on the oil and gas (O&G) sector, and related sectors. This could adversely impact the banks that have high exposures to the sector. Additionally, it is likely that volatility in the equities and commodities markets will continue.

It’s likely that property costs will adversely affect in Singapore. With banking and and companies already strike O&G laying off staff, property buyers might be more reluctant to enter the market, particularly if job security is a concern. Developers who have more exposure to markets, like China, that have been hit more severely by the global economic slowdown, might also feel bottom line pressures that could cause costs to be adjusted by them too.

In the long term, low oil prices will be a large boost to the general economy as the price of production has dropped. This could lead the next period of growth. Thus, low petroleum prices mightn’t function as the cause of doom and gloom that so many news reports mention.

Besides petroleum prices being a relevant indicator of international economc growth, there are several other indexes which have a direct impact on Singapore’s property market, including interest rate movements, the demand for and supply of properties, and government policies.

While cooling measures appear to have impacted the property market, they’re required to make sure that the marketplace continues to be sustainable, and doesn’t overheat. Nonetheless, having an imminent international economic slow down, it keeps steady growth, and is necessary to maintain a detailed eye available on the market, to be sure it isn’t too adversely strike.

With lowered prices in Singapore, and different indicators indicating a heavy thunderstorm on the way, property owners should review their financial predicament.

More importantly, property owners also must make sure they can manage their properties. For those people who are facing financial pressures, they may have to consider biting the bullet and downgrading. Nevertheless, property owners who are financially fit can consider taking advantage of lowered costs, and consider updating, or rearranging their property portfolios.

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