Are property costs affected by petroleum prices?

The costs of oil and property might not be connected, but property costs could be still affected by the economic effect of dropping oil prices.

Petroleum costs are constantly in the headlines. While other states have seen costs of oil and fuel -based products go down, costs in Singapore remain high. Alfred Chia describes how property prices and petroleum prices are linked.

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

Before petroleum prices can be understood by us, we should first comprehend how they can be calculated. In general, when we talk about oil prices, we are referring to the prices of Brent crude, a specific grade of oil extracted from 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 and global home costs compare Brent oil prices. Worldwide home prices are based on the Global Housing Price Index by the International Monetary Fund (IMF), which will be an aggregate of actual (i.e., inflation adjusted) house prices across countries.

At first, there appears to be little correlation between those two asset groups. As there clearly was an entire world-wide economic boom which pushed up costs of all asset classes, including bonds, equities and commodities from 2005 to 2007, both assets appreciated.

Yet, alongside the worldwide ecoomy, oil prices recovered from 2009 onwards before plunging due to production outpacing global demand. Worldwide property prices failed to follow the oil price trend, showing little correlation between these two asset categories.

On an international level at least, we do not see a correlation between housing costs and oil prices.

However, oil price movements have been more volatile, particularly since June 2014, when it started to plunge dramatically.

Though it is on a downwards trend, uRA’s price index remains comparatively constant. Just like home costs that are international, there seems to be little correlation between Singapore property costs along with the costs of petroleum.

However, while oil prices will not be Gem Residences strongly correlated with property costs, it’s an essential commodity that paints a picture of the global market, and may have an indirect influence on housing costs. Brent crude oil costs have dropped from a high of USD115.19 per barrel on 19 June 2014, to a low of USD26.01 per barrel on 20 January 2016. This translates to a 77 percent drop in Brent crude costs over a period of 20 months.

The most discussed reason for this radical fall is overcapacity and overproduction because the beginning of 2014. Nevertheless, apart from supply side reasons, international demand for this particular commodity also affects prices. The need for petroleum decreases and areas downward pressure on prices. Given both supply- and demand-side pressures on the prices of petroleum, it’s no wonder that costs have dropped as sharply and quickly as they’ve, placing budgetary pressures on economies that rely strongly on income from oil production.

Now, with all the world facing a global economy slow down, 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 place pressures on the oil and gas (O&G) sector, and associated businesses. This may adversely affect the banks which have high exposures to this sector. Additionally, it is likely that volatility in commodities markets and the equities will persist.

It is more likely that property costs will be adversely affected by a worldwide economic slow down in Singapore. With banking and O&G already hit and companies laying off staff, property buyers might be more reluctant to enter the marketplace, especially if job security is a concern.

As the cost of production has dropped, to the overall economy, low petroleum costs is a huge boost in the long run. This may lead another period of growth. Consequently, low petroleum prices might not be the basis for gloom and doom that many news reports mention.

While cooling measures seem to have negatively affected the property market, they are required to ensure that the marketplace continues to be sustainable, and will not overheat. Nevertheless, having an imminent international economic slowdown, it keeps steady increase, and is necessary to maintain a detailed watch available on the market, to be sure it isn’t too adversely hit.

With various indicators indicating a heavy thunderstorm on your way, and lowered prices in Singapore, property owners should review their financial situation. As a top priority, when they’re able to refinance to a more stable interest rate package, to manage their interest costs, property owners should review their loan packages and see.

Moreover, property owners also need to make sure their properties can be afforded by them. For those people who are facing fiscal pressures, they might need to think about biting the bullet and downgrading. However, property owners that are fiscally fit can consider taking advantage of lowered costs, and contemplate rearranging their property portfolios, or updating.

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