When falling oil prices weaken property demand

While oil prices have taken a drastic plunge recently, the consensus among economists is for regional economies to expand.
While oil prices have taken a drastic plunge recently, the consensus among economists is for regional economies to expand.PHOTO: BLOOMBERG

Link debunked by experts, but global luxury home sales suggest otherwise

This article was first published on Jan 12, 2015

Just by comparing the charts tracking the movement of crude oil prices and the local real estate prices, there would appear to be some correlation between the two asset classes.

What the charts show is that in the past 20 years, whenever oil prices are on the upswing, Singapore property prices climb as well. But when oil prices tumble, property prices soften too.

Does this mean that since oil prices have slumped by 50 per cent to about US$50 a barrel in the past six months, the real estate market may take a similar beating too?

Property consultants have been quick to point out that any correlation may be spurious.

Take the 1997-1998 Asian financial crisis, when crude oil prices more than halved from US$23 a barrel to US$10, and home prices - as measured by the URA Property Price Index - fell by up to 44 per cent at the same time.

Knight Frank chairman Tan Tiong Cheng recalled that the crisis had caused oil prices to fall because of a big drop in demand from major economies as consumption slumped. It also triggered a massive regional economic slowdown which affected Singapore's prospects and the employment market.

That, in turn, caused property prices to plunge, as home buyers became less confident of their job prospects.

Today, there is no financial crisis of similar magnitude in sight. The consensus among economists is for regional economies to expand, even though doubts have been expressed over a possible slowing down in China's growth.

Instead, the recent plunge in oil prices has been portrayed as a price war waged by Saudi Arabia, the world's largest oil producer, on US shale producers to try to put them out of business by keeping its production at existing levels, rather than cut output to boost prices.

On the demand side, China's thirst for oil has slackened due to a slowdown in its economic growth.

In Singapore, property prices had been going downhill even before oil prices crashed, due to other factors such as the Government's moves to cool the property market in recent years.

Mr Tan noted that one dampening factor is the total debt servicing ratio (TDSR), which caps the sum which a property buyer can borrow by ensuring that his monthly repayments, combined with all his other debt obligations, do not exceed 60 per cent of his gross monthly income. "TDSR effectively caused a significant reduction in transactions through crimping financing," he said.

So far, the focus of debate has been about the huge supply of homes to be completed in the next few years and the impact this would have on housing prices.

But the weakening demand deserves attention too. While developers were still able to move around 7,300 to 7,500 units in new sales last year, only an estimated 4,701 units changed hands in the resale market. This is down from the 6,678 units in 2013 and 13,214 units in 2012.

With more than 40,000 new condos likely to be completed in the next two years, the likelihood is that sentiment in the resale market will weaken further if large numbers of these units are put up for sale.

Some developers are hoping that foreigners will pick up some of the slack. As part of the Government's property cooling measures, an additional buyer's stamp duty (ABSD) is levied on foreigners and permanent residents buying residential properties as well as on Singaporeans who already own one residential property.

For foreigners, the ABSD is a hefty 15 per cent. That means if a foreigner buys a $1 million home, he will have to pay almost $180,000 in stamp duties.

In 2012 - the first full year to feel the impact of the ABSD - the number of private residences bought by foreigners fell by 62 per cent to 2,053 units from 5,480 units in 2011.

But falling oil prices have begun to cast a pall over luxury home sales in global cities such as London and New York, as interest from well-heeled investors from the Middle East and Russia dries up.

This raises a question as to whether developers can successfully lure foreigners to buy top-end condos, even if they can persuade the Government to tweak the ABSD rule.

A potential home buyer may do well to sit tight.

engyeow@sph.com.sg