The prices of property and petroleum might not be directly related, but the economic impact of falling oil prices could still affect property prices.
Petroleum prices are constantly in the headlines. While other states have seen prices of petroleum and fuel -based products go down, costs in Singapore stay high. Alfred Chia explains how property prices and petroleum costs are joined.
Falling oil prices have been in the news for the last six months, and property costs can also be Gem Residences on the decline. Will there be a link between them both?
Before we could comprehend oil costs, we must first comprehend how they are calculated. Generally speaking, when we talk about oil costs, we are referring to the prices of Brent crude, a particular level of petroleum extracted in the North Sea.
Figure 1 compares Brent oil prices with housing prices that are world-wide. World-Wide home costs are derived from the Global Housing Price Index by the International Monetary Fund (IMF), which is an aggregate of real (i.e., inflation adjusted) house costs across nations.
At first glance, there seems to be little correlation between these two asset classes. As there is an entire global economic boom which pushed up costs of most asset classes, including bonds, equities and commodities both assets appreciated.
Before plunging due to production outpacing international demand yet, alongside the worldwide ecoomy, oil prices regained from 2009 onwards. Worldwide property prices failed to follow the oil price trend, demonstrating little correlation between those two asset categories.
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 appear that they move in tandem (refer to Figure 2). Nevertheless, oil price movements happen to be more volatile, especially since June 2014, when it began to drop dramatically.
URA’s price index stays comparatively stable though it’s on a downwards trend. Like worldwide housing prices, there seems to be little correlation between Singapore property costs as well as the prices of oil.
However, while oil prices aren’t strongly correlated with property prices, it’s an essential commodity that may have an indirect impact on housing prices, and paints a picture of the worldwide economy. 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.
The most discussed reason for this drastic fall is overcapacity and overproduction since the beginning of 2014. Yet, apart from supply side reasons, prices are additionally affected by international demand with this commodity. A global economic slow down places downward pressure on costs and reduces the interest in oil.
Now, with all the world facing a global market slowdown, notably in China, the International Energy Agency (IEA) has forecasted that global need for oil will drop in 2016. In the short run, low petroleum costs will place pressures on the oil and gas (O&G) sector, and associated industries. This might adversely affect the banks which have high exposures for this sector. Furthermore, it is likely that volatility in the equities and commodities markets will continue.
It is more likely a worldwide economic slowdown will adversely affect property prices in Singapore. With off staff, property and O&G already strike and companies laying banking buyers might be more hesitant to enter the market, particularly if job security is a concern.
As the cost of production has dropped to the overall economy, low petroleum costs will be a large boost in the long run. This might lead the following phase of growth. Thus, low oil prices may not be the cause of gloom and doom that many news reports mention.
Aside from oil prices being a useful indicator of global economc growth, there are several other indexes which have a more direct impact on the property market in Singapore, such as interest rate movements, the demand for and supply of properties, and government policies.
While cooling measures appear to have affected the property marketplace, they can be necessary to make sure the market continues to be sustainable, and does not overheat. Nonetheless, having an impending world-wide economic slowdown, it is necessary to keep a close watch out there, to be sure it is just not overly adversely hit, and maintains steady growth.
With different indexes signalling a significant thunderstorm on your way, and lowered prices in Singapore, property owners should review their financial predicament. As a top priority, property owners find out if they have been able to refinance into a more secure rate of interest package, to manage their interest costs and should review their loan packages.
More importantly, property owners also must ensure they can afford their properties. For those who are facing fiscal pressures, they might have to consider biting the bullet and downgrading. Nevertheless, property owners who are financially fit can contemplate taking advantage of lowered prices, and consider rearranging their property portfolios, or updating.