Rising petrol prices not good for property
Rising fuel prices are likely to have a negative impact on the housing market, Goldman Sachs JB Were strategist Bernard Doyle says.
Thursday, April 27th 2006, 12:00AM
by The Landlord
He says there are a couple of factors at play; one is that rising prices makes people poorer, and poorer consumers are not good for the property market.
The other impact is that rising petrol prices add to the inflation rate, which is already running above the Reserve Bank’s mandated band of 1-3% annually.
Doyle says that if prices keep rising they may delay the central bank easing interest rates, which means that mortgage rates stay up.
Petrol prices aside, Doyle has become more relaxed about the outlook for the property market in recent months. Previously signs weren’t looking good, but with the recent turn around in net migration figures things look better.
With more people coming into the country there is a need for more houses. Australian property investment expert Steve McKnight is also warning that rising petrol prices may hurt the property market.
He uses an Australian example to illustrate the point saying that the cost of a 16c increase in petrol prices is the equivalent of taking a $710 pay annual pay cut.
Or another way of looking at it is to say this is about the same as a quarter of a percent increase in interest rates on a $275,000 mortgage.
“Even though interest rates are not going up at the moment (in Australia), the loss of earnings as a result of the higher cost of oil is having an equivalent effect for many people.”
He believes that with decreased affordability, people will not be able to borrow as much money, which in turn will limit growth in property prices.
Also “as people become fearful about the future, they are less reluctant to spend, so speculation is subdued.”
“The continued rise of the world oil price is therefore not a factor that assists in driving property values higher. In some ways, it's a bit like the story of the cooked frog... I'm told that if you put a frog in cold water then it lives, and if you slowly heat up the water, the frog won't notice, until you reach a critical point when all of a sudden it becomes cooked and dies.
“In the same way, the property makes is slowly cooking away.
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