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Background
At the moment, the real estate business is developing more rapidly. Despite the difficulties that the global coronavirus pandemic has brought, this area of human activity is gaining lost strength. Thus, there are more and more different trends in this area. Researching relationships with them can significantly help in gaining knowledge about how to improve the industry. This scientific work aims to consider the impact of such a real estate trend as oil prices and how their growth or fall affects it.
Overview of the Trend
First of all, it is necessary to have an accurate understanding of what real estate is in modern society. This business includes the sale, purchase, and rental of real estate. It also has a large number of different benefits for investors, such as inflation protection, diversification, and long-term security. However, all these aspects cannot ultimately limit the contribution that external factors such as changes in oil prices have.
The spread of coronavirus infection has had its consequences for the real estate market in Canada. Only by the fourth quarter of 2020, the industry begin to slowly recover (). Due to a sharp increase in demand for rental and purchase of housing, one of the sharpest price spikes in history occurred. This is due to the previous supply shortage, which intensified closer to 2021. However, an increase in prices is still expected, due to the return of workers from other countries and migrants due to the mitigation of covid measures. The global disease and measures to combat it have not spared the sphere of oil production (Akhtaruzzaman et al., 2021). Hence, there was an increase of over 40 percent compared to the oil price a year prior ( Average monthly Western Canadian Select (WCS) crude oil price, 2021, para. 1). This had an impact on a significant decline in demand for oil and also in the real estate market.
The trend under study implies a direct and, at the same time, rather complex mutual relationship between the variation in the cost of a resource and prices and trends in real estate. Sources note that recently there has been a drop in this indicator, and it is also characterized by constancy. Thus, the effect that this circumstance can give to real estate is a serious blow in areas where the oil industry is more important.
Moreover, in the regions of the country that are most dependent on the level of oil prices, there is a higher coefficient of dependence of this aspect with real estate. Thus, an increase in the cost of oil products they have a positive effect on the amount of demand. In turn, this creates conditions for economic growth job growth, which affects the flow of various specialists to the region. Consequently, the demand for rental and purchase of housing is also increasing, thereby increasing the economic indicators of the real estate industry. In the same way, with a price decline, there is a significant reduction, and the real estate sector suffers.
Causes that Have Created the Trend
There are several factors that influenced the emergence of this trend. However, it is worth noting that this is by no means a new trend since oil prices and the real estate sales industry have always been influenced by various external factors, especially economic ones. Therefore, one of the reasons is, as already emphasized, the level of demand for a resource, depending on its price, which directly affects the demand and prices of the real estate market. Moreover, in addition to rising prices, the cost of various resources that are needed for construction and repair work is changing, which also affects the cost and quantity of affordable housing. Thus, the increase in prices for oil products led to an increase in spending on real estate services.
Another reason for such close interaction of the studied indicators is the fact that an increase in oil profitability can lead to the transfer of funds to the oil market due to investments in the real estate industry. This may lead to a decrease in real estate prices due to an increased focus on the markets at the expense of assets (Hamed, 2020). In addition, stricter regulation of monetary policy may lead to a decrease in demand for housing and a deterioration of the market. Finally, such cost-related factors, such as monetary policy and regulation, can affect both the prices of petroleum products and housing.
Despite the above-mentioned factors, the most negative is the fall in oil prices. If this happens, there is a significant loss of profit for companies working in this field (Hoesli & Malle, 2021). In addition, there is also a reduction in staff. Thus, workers who once moved because of a new workplace are selling their homes. At the same time, real estate prices are set significantly lower than the original ones. There may be a temporary lag between the decline in oil prices and housing prices. However, it is worth emphasizing that recently there has been a gradual rise in oil production (Figure 1). Despite a rather sharp decline in production after the occurrence of coronavirus infection and the adoption of quarantine measures, the country is gradually returning to past indicators.
Impact the Trend Will Have on the Real Estate Industry
The previous section of this research paper has already touched on the possible contribution that the oil price trend may have to the real estate industry. If this happens, large industrial regions can support their economy with the help of other business areas, but smaller regions can tolerate a crisis. Moreover, the housing market will not experience significant losses due to sudden sales and falling prices for houses and apartments in larger areas. Small cities, where oil production is the leading and most valuable source of strengthening the economy, may suffer changes when prices fall. However, such abrupt transformations can have a positive effect as they can contribute to the reduction of economic stagnation. This is due to the fact that finding ways out of the critical state may occur, which will subsequently improve this area of the regions functioning and will not affect the real estate market so much in the future.
Further, oil prices are a direct indicator of the economic viability of cities since when they change, their readiness can be observed. In addition, these transformations have a direct impact on the real estate industry (Alola, 2021). These relationships are also reflected in the level of interest rates on the purchase of real estate and also show the financial well-being of the region. Oil and the value of the dollar are interrelated, and the cost of housing is susceptible to them. Thus, with the growth of the exchange rate in some countries, the price for sale, purchase, and rent may also increase. Sources note that there is an oil price that keeps the real estate market stable. This indicator is twenty-five dollars per barrel. Thus, it is easy to determine that both positive and negative can occur during its fluctuation.
It is also worth adding that the influence of the oil price and the prices of commercial and residential real estate can be determined by the domino effect. This characteristic is especially evident after the appearance of COVID-19 in the United States of America. This country was one of the largest producers of oil products (Michieka et al., 2021). If there are any changes in the cost of oil, the country also experiences them for itself, which leads to a loss of profit and productivity. Additionally, some collapse occurred because there was a reduction of employees in many companies, and at the same time, many people needed a place to survive the quarantine. All these factors influenced the change in prices for renting and buying real estate.
Due to the reduced number of employees, as expected, companies and manufacturers had to reduce the number of raw materials produced. In this case, the damage was caused to the suppliers of the necessary materials needed to ensure the production sectors. With a decline in profits, manufacturers also have to delve into the number of employees, and this happens to all participants in this process. In the course of this domino effect, the economy has declined in America, and the unemployment rate has increased. Especially in a dangerous situation was that part of the population that has mortgages for real estate. Due to the lack of the ability to pay for loans, some foreclosures may occur, which can dramatically reduce the value of the real estate (Rehman et al., 2020). All this affects the reduction of prices and the decrease in the value of many, even prestigious, areas in cities.
Recommendations for Preparing for the Change and Ways to Manage It
During the period of decline in the price index for raw materials, it may also negatively affect the reduction of its production processes. Henceforth, it is necessary to involve in the process of providing protection from this factor, in addition to local enterprises and manufacturers, also the government. This is due to the fact that all these participants may suffer if the industry falls into a period of recession.
The previously given data in this scientific work show the dependence of the real estate market and the cost of petroleum products. This is determined by the presence of several communication sources at once, which also determines the need to develop specialized measures. First of all, in order to reduce the negative impact of oil prices on the real estate market, an initial eradication of the problem of preparation for it by the oil business is necessary. Of particular value is the tracking of periods of growth and decline in oil prices. To do this, manufacturers and companies should involve specialists in their activities who will monitor various global trends that may affect the industry. Moreover, it is essential to analyze and interpret previous historical data and compare it with modern political, economic, and socio-economic dynamics, which are of particular importance. In this case, companies and real estate employees can excel using this trend.
In order to maintain the most stable position with lower oil prices and less impact on the economy, companies need to diversify their sources of financing. Moreover, attracting insurance funds to finance mortgage lending can be a useful measure if we consider the sphere of sale and rental of real estate. A unique role is played by attracting private investment through active action and distribution in the securities market. One of the simplest but, at the same time, effective ways can be the creation of a common standard for drafting contracts. This applies to securities that are concluded by construction companies in order to create new real estate objects in the mortgage market.
Summary of How the Trend Will Change the Real Estate Industry
Changes in oil prices may affect the production and maintenance of equipment necessary to support production. In the same way, prices may change not only for the purchase and rental of real estate but also for housing and communal services. In the same way, there may be an increase in the inflation rate and a tightening of the credit policy of banks. This measure may lead to a decrease in demand for housing and, thereby, profits. However, with rising prices for petroleum products, this type of industry may attract more interested companies, which may lead to the withdrawal of capital from the housing market. Thus, based on these factors, it can be concluded that the real estate industry and oil production are in close relationship and joint dynamics. In conclusion, when considering the fact that further growth in oil prices should be expected, there will be an increase in prices for the real estate market due to the gradual recovery from the pandemic.
References
Akhtaruzzaman, M., Boubaker, S., Chiah, M., & Zhong, A. (2021). COVID 19 and oil price risk exposure. Finance Research Letters, 42, 101882. Web.
Alola, A. A. (2021). Evidence of speculative bubbles and regime switch in real estate market and crude oil price: Insight from Saudi Arabia. International Journal of Finance & Economics, 26(3), 3473-3483. Web.
Average monthly Western Canadian Select (WCS) crude oil price from January 2020 to December 2021. (2021). Statista. Web.
Canada crude oil production. (2021). Trading Economics. Web.
Hamed, E. (2020). Could low oil prices hurt the real estate market?. Mashvisor. Web.
Hoesli, M., & Malle, R. (2021). Commercial real estate prices and covid-19. Journal of European Real Estate Research. Web.
Michieka, N. M., Gearhart III, R. S., & Ampatzidis, Y. (2021). Oil prices, the housing market, and spillover effects: Evidence from Californias central valley. Journal of Housing Research, 30(1), 77-97. Web.
Rehman, M. U., Ali, S., & Shahzad, S. J. H. (2020). Asymmetric nonlinear impact of oil prices and inflation on residential property prices: a case of US, UK and Canada. The Journal of Real Estate Finance and Economics, 61(1), 39-54. Web.
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