The prices of property and petroleum may not be associated, but property prices could be still affected by the economic impact of falling oil prices.
Petroleum costs are constantly in the headlines. While other nations have found prices of fuel and petroleum -based products go down, costs in Singapore stay high. Alfred Chia describes how oil prices and property prices are linked.
Falling oil prices have really been for the past six months in the news, and property prices are also on the decline. Can there be a connection between them both?
Before we are able to understand petroleum costs, we should first comprehend how they are calculated. In general, when we talk about oil prices, we are referring to the prices of Brent crude, a specific level of oil pulled from the North Sea. Brent crude is 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 housing prices that are international and Brent oil prices. Global housing costs are derived from the Global Housing Price Index by the International Monetary Fund (IMF), which is an aggregate of actual (i.e., inflation adjusted) house costs across states.
At first glance, there seems to be little correlation between both of these asset groups. As there is an overall international economic boom which pushed up costs of the majority of asset classes, including bonds, equities and commodities both assets appreciated. Subsequently, between 2008 and 2009, marketplaces were hit by the Global Financial Crisis (GFC), which saw both oil and housing prices drop, along with most other asset categories.
However, alongside the international ecoomy, petroleum prices recovered from 2009 onwards before plunging in mid 2014 due to production outpacing international demand. Global property costs failed to follow the oil price trend, showing little correlation between both of these asset classes.
On a worldwide level at least, we do not see a correlation between home prices and oil prices.
When we compare the Urban Redevelopment Authority’s (URA) Singapore Property Price Index and oil prices, it might seem that they go in tandem (refer to Figure 2). However, oil price movements have been more explosive, particularly since June 2014, when it began to dive drastically.
Though it’s on a downwards trend, the price index of uRA remains relatively constant. Like global housing prices, there seems to be little correlation between Singapore property prices and also the costs of oil.
However, while oil prices are not strongly correlated with property costs, it is an essential commodity that may have an indirect influence on home prices, and paints a picture of the worldwide market. 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 fall in Brent crude costs over a period of 20 months.
The most talked about reason for this drastic fall is overcapacity and overproduction since the start of 2014. Yet, apart from supply side reasons, worldwide demand for this commodity also impacts prices. A global economic slow down places downward pressure on prices and reduces the need for oil. Given both supply- and demand-side pressures on the prices of oil, it’s no wonder that costs have dropped quickly as they’ve and as sharply, setting budgetary pressures on economies that rely strongly on income.
Now, with all the world facing a worldwide market slowdown, particularly in China, the International Energy Agency (IEA) has forecasted that global demand for oil will fall in 2016. In the short run, low petroleum costs will put pressures on the petroleum and gas (O&G) sector, and related businesses. This might adversely impact the banks that have high exposures to the sector. Furthermore, it is not unlikely that volatility in the equities and commodities markets will persist.
It is likely that property costs will be adversely affected by a global economic slow down in Singapore. With banking and and firms already hit O&G laying off staff, property buyers might be more hesitant to enter the marketplace, particularly security is a concern.
As the price of production has fallen in the long run, low oil prices will be a big increase to the overall market. This might lead the following stage of growth. Thus, low petroleum prices may not be the reason for doom and gloom that many news reports mention.
Aside from oil costs being a relevant indicator of global economc growth, there are other indexes that have a direct impact on the property market in Singapore, such as interest rate movements, the demand for and supply of properties, and government policies.
They can be necessary to ensure that the market continues to be sustainable, and doesn’t overheat, while cooling measures seem to have negatively influenced the property marketplace. Nevertheless, with the imminent international economic slowdown, it is essential to keep a detailed eye out there, to be sure it is not overly adversely hit, and maintains steady increase.
With lowered costs in Singapore, and assorted indicators indicating a heavy thunderstorm on the road, property owners should review their financial situation.
More importantly, property owners also have to ensure their properties can be afforded Gem Residences by them. For those people who are facing financial pressures, they may have to consider biting the bullet and downgrading. Nonetheless, property owners that are fiscally fit can consider taking advantage of lowered prices, and consider rearranging their property portfolios, or updating.