The costs of petroleum and property might not be associated, but property prices could be still affected by the economical effect of dropping oil prices.
Oil costs are always in the headlines. While other states have found prices of oil and fuel -based products go down, costs in Singapore stay high. Alfred Chia Gem Residences explains how petroleum costs and property prices are joined.
Falling oil prices happen to be in the news for the last six months, and property prices are also on the decline. Can there be a connection between them both?
We must first understand how they may be calculated before we can comprehend petroleum costs. Generally speaking, when we talk about oil costs, we are referring to the costs of Brent crude, a specific level of petroleum pulled in the North Sea. Brent crude can be used to price about two-thirds of the world’s internationally traded crude oil supplies.
Figure 1 and worldwide housing prices compare 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 actual (i.e., inflation adjusted) house prices across states.
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 entire global economic boom which pushed up costs of the majority of asset classes.
Yet, alongside the worldwide ecoomy, oil costs recovered from 2009 onwards before diving due to production outpacing world-wide demand in mid 2014. Worldwide property costs did not follow the oil price trend, showing little correlation between these two asset categories.
On a global level at least, we do not 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 drop dramatically.
Though it is on a downwards trend, uRA’s price index stays relatively stable.
However, while oil prices are not strongly correlated with property costs, it is a vital commodity that paints a picture of the worldwide market, and could have an indirect effect on home costs. This translates to a 77 percent drop in Brent crude prices over a span of 20 months.
The most discussed reason for this radical fall is overproduction and overcapacity since the start of 2014. Nonetheless, apart from supply side reasons, prices also changes. The need for petroleum reduces and areas downward pressure on costs.
Now, with all the world confronting an international economy slowdown, particularly in China, the International Energy Agency (IEA) has forecasted that global need for oil will drop in 2016. In the short run, low petroleum prices will put pressures on the petroleum and gas (O&G) sector, and associated sectors. The banks that have high exposures to the sector could be adversely impacted by this. Furthermore, chances are that volatility in the equities and commodities markets will remain.
It’s likely that property costs will adversely impact in Singapore. With off staff, property and O&G already hit and companies laying banking buyers might be more reluctant enter the market, particularly if job security is a concern.
As the price of production has fallen in the future, low petroleum prices will be a large increase to the overall economy. This might lead the following phase of growth. Hence, low petroleum prices may not be the reason for doom and gloom that many news reports mention.
They’re necessary to make sure that the marketplace continues to be sustainable, and doesn’t overheat while cooling measures appear to have negatively impacted the property market. Nevertheless, with the imminent international economic slow down, it is necessary to maintain a detailed watch on the market, to be sure it is just not overly adversely hit, and maintains steady growth.
With lowered costs in Singapore, and different indexes indicating a significant storm on the way, property owners should review their financial predicament. As a top priority, if they’re able to refinance to a more stable rate of interest bundle, to manage their interest costs, property owners should review their loan packages and find out.
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. However, property owners consider upgrading, or rearranging their property portfolios, and who are fiscally fit can consider taking advantage of lowered prices.