The prices of oil and property may not be directly related, but the economic impact of falling oil prices could still affect property prices.
Oil prices are constantly in the headlines. While other countries have seen costs of fuel and petroleum-based products go down, costs in Singapore remain high. Alfred Chia explains how oil prices and property prices are connected.
By Alfred Chia
Falling oil prices have been in the news for at least the past six months, and property prices are also on the decline. Is there a link between the two?
Before we can understand oil prices, we must first understand how they are calculated. In general, when we talk about oil prices, we are referring to the prices of Brent crude, a particular grade of oil extracted from the North Sea. Brent crude is used to price 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.
On a global level
Figure 1 compares Brent oil prices with global housing prices. Global housing prices are based on the Global Housing Price Index by the International Monetary Fund (IMF), which is an aggregate of real (i.e., inflation adjusted) house prices across countries.
At first glance, there seems to be little correlation between these two asset classes. From 2005 to 2007, both assets appreciated as there was an overall global economic boom which pushed up prices of most asset classes, including bonds, equities and commodities. Then, between 2008 and 2009, markets were hit by the Global Financial Crisis (GFC), which saw both oil and housing prices drop, along with most other asset classes.
However, from 2009 onwards, oil prices recovered alongside the global ecoomy before plunging in mid 2014 due to production outpacing global demand. Global property prices did not follow the oil price trend, showing little correlation between these two asset classes.
On a global level at least, we don’t see a correlation between oil prices and housing prices.
Looking at Singapore
When we compare the Urban Redevelopment Authority’s (URA) Singapore Property Price Index and oil prices, it may seem that they move in tandem (refer to Figure 2). However, oil price movements have been more volatile, especially since June 2014, when it began to plunge drastically.
URA’s price index remains relatively stable though it is on a downwards trend. Just like global housing prices, there seems to be little correlation between Singapore property prices and the prices of oil.
However, while oil prices are not strongly correlated with property prices, it is an important commodity that paints a picture of the global economy, and could have an indirect effect on housing prices. Brent crude oil prices have fallen 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 prices over a span of 20 months.
The most talked about reason for this drastic drop is overcapacity and overproduction since the beginning of 2014. However, apart from supply side reasons, global demand for this commodity also affects prices. A global economic slowdown decreases the demand for oil and places downward pressure on prices. Given both supply- and demand-side pressures on the prices of oil, it is no wonder that prices have fallen as sharply and quickly as they have, placing budgetary pressures on economies that rely strongly on income from oil production.
Grey clouds on the horizon
Now, with the world facing a global economy slowdown, especially in China, the International Energy Agency (IEA) has forecasted that global demand 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 related industries. This could adversely impact the banks that have high exposures to this sector. Furthermore, it is likely that volatility in the equities and commodities markets will persist.
It is more likely that a global economic slowdown will adversely affect property prices in Singapore. With banking and O&G already hit and companies laying off staff, property buyers might be more hesitant to enter the market, especially if job security is a concern. Developers who have more exposure to markets, like China, that have been hit more severely by the global economic slowdown, might also feel bottom line pressures that would cause them to adjust prices as well.
In the long run, low oil prices will be a big boost to the general economy as the cost of production has fallen. This could lead the next phase of growth. Therefore, low oil prices might not be the cause of doom and gloom that so many news reports mention.
Apart from oil prices being a relevant indicator of global economc growth, there are other indicators that have a more direct impact on Singapore’s property market, such as interest rate movements, the demand for and supply of properties, and government policies.
While cooling measures seem to have negatively impacted the property market, they are necessary to ensure that the market does not overheat, and continues to be sustainable. However, with an impending global economic slowdown, it is necessary to keep a close eye on the market, to make sure it is not too adversely hit, and maintains steady growth.
With lowered prices in Singapore, and various indicators signalling a heavy storm on the way, property owners should review their financial situation. As a top priority, property owners should review their loan packages and see if they are able to refinance to a more stable interest rate package, to manage their interest costs.
More importantly, property owners also need to ensure they can afford their properties. For those who are facing financial pressures, they might need to consider biting the bullet and downgrading. However, property owners who are financially fit can consider taking advantage of lowered prices, and consider upgrading, or rearranging their property portfolios.
Alfred Chia is the Chief Executive Officer of SingCapital Pte Ltd
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