First up I’m no economist! My flame suit is ready
With the oil price at record levels, and looking to be there for a significant amont of time, I wonder the short and medium term effect this has directly on property.
So to my very simple, likely misinformed view, we pay more for petrol and oil products and have less disposable income as a result. The flow on is that suppliers of all kinds would face tighter margins and pass on their increased frieght costs to the consumer. People would push for pay rises to accomodate their increased living expenses. So one would conclude that inflation could rise more than expected and put pressure on interest rates, pushing the property market down as people start to feel the pinch.
But of course, if people stop spending, this also reduces inflationary pressure because in a competitive market, companies would face margin pressure anyway. Thus they would absorb some of that fright cost to keep market share and their product moving. That in combination with people spending less may mean that inflation pressure is not too much. But surely people ‘knuckling down’ and retiring some debt is just as bad to the property investment market (both for sellers as well as landlords). Rental yields will remain flat and so would upward pressure on sale prices?
Then of course there is the factor of the local ecomomies with WA benefiting from the resource boom as infrastructure investment needs to be made to accomodate the demand of countires like China, and over the medium to longer term, India.
But I am wondering what others think?
EZ-Rent. The freeware tax and cashflow simulator for Australian property investors. Version 2.5 out now!
http://www.ez-rent.comWill the oil price impact on the property market- Only if you have invested in motor homes! [biggrin]
With all the different economic indicators and what affect they have on each other and the universe I’m beginning to wonder that it’s not just all a huge conspiracy spun by evil economists worried about losing their jobs.
But who knows, everything seems to have a flow-on effect these days so you might be onto something EZ?
I like the logic of your post ez-rent. I’m not an economist either, but I have a few thoughts.
From memory, I think a 10% increase in the cost of petrol translates roughly to a 0.5% increase in CPI. This is approximately what we look to be facing in the short term ($1.05/l -> $1.20/l).
Clearly this will place pressure on interest rates.
However, if oil prices remain high, increased transport and manufacturing costs will gradually feed through to consumer prices. Pretty much everything consumers purchase is either created from, harvested with or shifted using oil products. Even the little things – for example:Tesco, for example, is having to pay an extra £9million a year for its plastic carrier bags, which are made from a by-product of petrol. Source HereSo the effect on CPI and pressure on interest rates would be greater than just the index weighting of petrol.
Then there is the very real risk that the AUD will continue its decline against the USD (unless the RBA support it by the only means available to them – higher interest rates!). A barrel of oil is currently around $78 Australian. If the AUD falls to 0.60 USD, that barrel of oil will cost around $100 Australian – the same as if oil was $77 US now!
In the medium term I don’t see oil prices falling, in fact I would not be surprised to see significantly higher prices during the northern winter(s). Add that to the above mix…So how does a rising oil price impact property prices? Mums & Dads have less disposable income. There is a very real chance they will face higher interest rates. There is a greater chance of redundancy at work – particularly in retail as businesses find their costs increasing while consumers reduce spending. In short, higher oil prices do not encourage house price inflation.
On a brighter front, it might be a good chance to pick up a gas guzzling 4wd for cheap!
Cheers, F.[cowboy2]
I’ve been told that by smarter people than me that the US$ is not going to correct anytime soon. From my reading their massive deficit actually puts downward pressure on the dollar.
The US credit binge has been worse than ours..
EZ-Rent. The freeware tax and cashflow simulator for Australian property investors. Version 2.5 out now!
http://www.ez-rent.compeople still need to live somewhere – I just see a value re-weighting from outer areas to inner city areas. I think we have all seen this coming for a very long time.
http://www.megainvestments.com.auJohn Carroll
I’ve been told that by smarter people than me that the US$ is not going to correct anytime soon. From my reading their massive deficit actually puts downward pressure on the dollar.Yes. And no. The US Federal Reserve is prepared to aggressively defend the value of its dollar. It has been doing so with a series of interest rate hikes since mid last year. Sure, in the medium to long term there will be a lot of financial pain in the US, but there is nothing to suggest that a correction is imminent.
The US credit binge has been worse than ours..The US current account deficit is around 6% of GDP. Ours is 7.2%. At least our governments have been wise enough to run surplus budgets during the recent ‘fat’ years. Theirs have not.
Last year, Americans were holding onto $37 trillion in debt – more than $123,000 for every man, woman and child in the United States. This amount of debt is more than three times the total number of dollars in existence anywhere – in home and business equity, checking and savings accounts, stock markets and even those held by foreign investors (66% of all dollars are held by foreign investors, by the way). If all of this debt comes due, there literally isn’t enough money on Earth to pay it.
Kurt RichebächerYou have to love the power of fiat money…
On that matter, over the last 36 months, fiat money and reserve banking have enabled housing in developed countries to rise in total ‘value’ by 50% or 20 Trillion dollars (US) to over 60 Trillion. Brilliant! And people think I’m silly for hoarding precious metals instead of buying houses!Anyway, back on topic – I agree somewhat with Ausprop. Inner city will be more desirable than new outer suburb developments, particularly as traffic congestion has caused peak hour travel times to double in many parts of Melbourne, Brisbane and Sydney over the last couple of years. However, I think the effect of higher petrol prices on house prices will be slight if any and lost in the landslide of declining prices.
Slightly on topic – how to benefit from high oil prices? In the short to medium term some oil exploration companies should do well, but the smaller ones will be a loser in years to come as oil reserves dwindle. For long term growth I’d expect the biggest oil/energy companies to be best placed to develop or embrace alternative fuel technology. Anyone with a stake in uranium reserves should be a winner, and of course biofuel and sugar will provide alternatives to petrol.
(And don’t forget that a bit of gold and silver will be nice to hold when the Americans are forced to face the reality of their excesses!)Cheers, F.[cowboy2]
Although I’m ambivilent on gold (lets face it there are a lot of really nutty goldbugs out there that say gold will hit US$2000 an ounce and have been saying so for a very long time
I agree with your comments on the likely places to profit from the high oil price.I also like Agribusiness. Although it is impacted by fuel costs, the core markets are China for paper or food products and we all have to eat.
Plus I’m quite sure that the agribusiness still haven’t quite come back to the pre 2000 revenue/profit levels when they got decimated by the ATO cracking down on the all the dodgy schemes.
EZ-Rent. The freeware tax and cashflow simulator for Australian property investors. Version 2.5 out now!
http://www.ez-rent.comBeing in the oil industry, I absolutely love high oil prices. Our work commitment (the drilling schedule) is solid til mid 2008 and I’ve had two pay rises totalling 14.7% over the past 3-1/2 months.
Petrol at the bowser and slightly higher costs on everything else to account for transportation charges is extremely minor in the grand scheme of things for our family.
Being paid in tax free USD helps heaps too, although I’d dearly love the XR back to the AUD to drop back to 50 or 52c.
In short, for us, higher oil prices means property is much more affordable. Bring it on…100 $ oil I say.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Hehe, I wish I was still in the mining industry! Don’t suppose you have vacancies for process control monitoring do you?
EZ-Rent. The freeware tax and cashflow simulator for Australian property investors. Version 2.5 out now!
http://www.ez-rent.comOriginally posted by Dazzling:Petrol at the bowser and slightly higher costs on everything else to account for transportation charges is extremely minor in the grand scheme of things for our family.
Agreed. I won’t start complaining until prices get above $2.50/l. I think reducing our reliance on oil would be a good idea, and higher costs at the pump will help. Anybody who struggles to afford $1.20/l is likely to be lacking financial nouse.
On a side note, today’s newspaper reports that Swiss scientists have developed a car using hydrogen fuel cell technology that “could circle the globe on 8 litres of fuel”. Neat.
F.[cowboy2]Agreed. I won’t start complaining until prices get above $2.50/l. I think reducing our reliance on oil would be a good idea, and higher costs at the pump will help. Anybody who struggles to afford $1.20/l is likely to be lacking financial nouse.On a side note, today’s newspaper reports that Swiss scientists have developed a car using hydrogen fuel cell technology that “could circle the globe on 8 litres of fuel”. Neat.
Completely off topic, but fuel cells are blue sky stuff, massive infrastructure problems to solve with distribution of hydrogen etc. Far more practical are modern turbo diesels. A modern diesel engine will use 40% less fuel than similar petrol engine, produce similar power, and about twice as much torque. They are very clean burning and will run on biodiesel unmodified.
Over 60% of new car sales in Europe last year were diesels, which is 100x the number of hybrids sold worldwide. Also, several European countries mandate a percentage of biodiesel in all diesel fuel sold.
Frankly, while petrol is cheaper than bottled water we are never going to wean ourselves off our crude oil dependency.
Do the new Peugots have such engines? The fuel consumption on their mid size diesels are incredible. If they can run on bio-diesel I might be interested.
Any idea?
F.[cowboy2]Do the new Peugots have such engines? The fuel consumption on their mid size diesels are incredible. If they can run on bio-diesel I might be interested.
Any idea?Peugeot makes good diesels, but I recently sold a late model Peugeot because it fell apart on me (literally).
I now own a 2.0L VW Golf turbo diesel. This car has the same torque (320Nm) as a 3.5L V6 at only 1750rpm, but it uses just 5.7L/100km (official numbers) and less than 7L/100km in stop/start traffic. On a trip from Canberra to Sydney last weekend it used 4.6L/100km (or 61.5mpg in the old money).
The only downside to owning a diesel is finding a pump, and when you do it might be a bit oily/greasy … but then you go to the service station half as often.
Biodiesel is very hard to find in Australia, and the Howard government made the situation worse recently by taxing small ‘home brew’ producers.
Check out these links:
http://www.farmersfuel.com.au/
http://www.pipeline.to/biodiesel/projects/aus.html
http://www.mypage.tsn.cc/biodiesel/
http://biodiesel.infopop.cc/eve/ubb.x/a/frm/f/939605551
http://forums.tdiclub.com/postlist.php?Cat=0&Board=UBB44I would prefer to keep the jobs in the country and buy a locally produced car. this country needs more industry than just building houses. just buy a commodore on gas if you are that worried about it.
http://www.megainvestments.com.auJohn Carroll
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