Falling oil prices will lift global real estate

Global real estate, both residential and commercial, is benefiting around the globe from the fall in crude oil prices. 

Xinyuan is is a leader in global real estate, up 65.32% this year

When oil prices fall, global real estate benefits with every transaction. Lower oil prices result in cheaper financing, cheaper materials and a deeper pool of buyers around the world.

This has been clearly demonstrated by the share price performances of the main exchange traded fund for oil, United States Oil, (USO, quote) and home builder prices around the world.

Year to date, USO is down 16.56%. Xinuyan Real Estate Company, (XIN, quote), a Chinese home builder, is up 65.32% for 2012. Over the same period,  Israeli manufactured-home company CaesarStone Sdot-Yam (CSTE, quote), has risen by 6.21%. The main exchange traded fund for home builders, SPDR Home Builders, (XHB, quote), has jumped 19.62% since the beginning of the year.

The main reason for this is that lower oil prices increase the pool of buyers. Falling oil prices keep inflation down, which results in lower interest rates; and, thus, cheaper mortgages. As a result, more can qualify for mortgages to buy both residential and commercial real estate.

When crude is down, gas and heating oil is lower. More buyers will consider a longer commute with lower motor fuel prices. More buyers will consider buying buildings heated with oil when utility costs are falling. Properties previously considered to be uneconomical are now financially viable as a result of declining crude resulting in lower commuting and heating costs.

The construction expenses for commercial and residential properties also fall. Petroleum is a base for paints, asphalts, solvents, etc, and many other supplies used in the building process. In addition, transportation costs are much lower in the construction of a home, warehouse, shopping mall, or office park.

Most important of all, cheaper imported oil results in strong economies for oil importing nations. The billions that would have gone to oil exporting states now remain at home. From that, domestic consumer spending rises by the amount saved by the lower cost of oil. That directly produces more jobs, which improves the global real estate market.

The largest of the global real estate markets are also the largest importers of crude oil: China, Brazil, India and the United States. The more crude oil falls, the more residential and commercial real estate will be sold in those and other oil importing nations. If oil continues to decline and remains at lower levels, global real estate will continue to recover.

 

Leave a Reply