The prices of petroleum and property might not be related, but the economical effect of dropping oil prices could still influence property prices.
Oil prices are constantly in the headlines. While other countries have seen prices of fuel and petroleum -based products go down, prices in Singapore remain high. Alfred Chia describes how oil prices and property costs are linked.
Dropping oil prices have really been in the news for the past six months, and property costs will also be on the decline. Can there be a connection between them both?
We have to first comprehend how they can be computed before we can understand petroleum costs. In general, when we talk about oil prices, we are referring to the prices of Brent crude, a specific level of oil extracted in the North Sea. Brent crude can be used to cost about two thirds of the world’s internationally traded crude oil supplies. At time of writing, Brent crude is about USD 41.20 per barrel.
Figure 1 compares global housing costs and Brent oil costs. Global housing prices are derived from the Global Housing Price Index by the International Monetary Fund (IMF), which can be an aggregate of real (i.e., inflation adjusted) house prices across states.
At first, there seems to be little correlation between these two asset classes. Both assets appreciated as there was an overall world-wide economic boom which pushed up prices of most asset classes, including bonds, equities and commodities.
Nonetheless, from 2009 onwards, oil prices regained alongside the worldwide ecoomy before dropping in mid 2014 due to production outpacing world-wide demand. International property prices did not follow the oil price trend, showing little correlation between both of these asset classes.
On an international level at least, we don’t see a correlation between oil prices and home prices.
When we compare the Urban Redevelopment Authority’s (URA) Singapore Property Price Index and oil prices, it may seem that they go in tandem (reference Figure 2). Nonetheless, oil price movements happen to be more explosive, particularly since June 2014, when it began to plunge dramatically.
Gem Residences strongly correlated with property costs, it is an essential commodity that paints a picture of the global market, and might have an indirect impact on home prices.
The most talked about reason with this extreme drop is overproduction and overcapacity since the start of 2014. Yet, apart from supply side reasons, costs additionally impacts. The need for oil decreases and places downward pressure on prices. Given both supply- and demand-side pressures on the prices of petroleum, it is no surprise that costs have fallen immediately as they have and as sharply, putting budgetary pressures on economies that rely strongly on income from oil production.
Now, with all the world facing an international economy slowdown, particularly in China, the International Energy Agency (IEA) has predicted that global need for oil will drop in 2016. In the short run, low petroleum prices will place pressures on the petroleum and gas (O&G) sector, and associated industries. This may adversely impact the banks that have high exposures to this sector. Moreover, it’s likely that volatility in commodities markets and the equities will remain.
It is more likely that property prices will adversely impact in Singapore. With banking and O&G already strike and businesses laying off staff, property buyers might be more hesitant to enter the market, especially security is a concern. Programmers who have more exposure to markets, like China, that were hit more severely by the global economic slowdown, might also feel bottom line pressures that will cause them to fix prices too.
As the cost of production has dropped in the long run, low petroleum costs is a large boost to the overall market. This may lead the next stage of growth. So, low petroleum prices mightn’t function as the basis for gloom and doom that many news reports mention.
While cooling measures appear to have negatively impacted the property marketplace, they’re essential to make certain the marketplace continues to be sustainable, and does not overheat. However, with an impending international economic slow down, it maintains steady increase, and is necessary to keep a detailed eye in the marketplace, to be sure it is just not overly adversely hit.
With different indicators indicating a significant thunderstorm along the way, and lowered prices in Singapore, property owners should review their financial predicament. As a top priority, when they’re able to refinance to a more secure interest rate bundle, to manage their interest costs, property owners should review their loan packages and see.
Moreover, property owners also must make sure their properties can be afforded by them. For those who are facing financial pressures, they might have to think about biting the bullet and downgrading. Nevertheless, property owners that are fiscally fit can consider taking advantage of lowered prices, and contemplate updating, or rearranging their property portfolios.