Over the last six months we have seen the price of oil half from over $100 a barrel to less than $50 at its worst. The situation has recovered slightly for the last few days with some more positive comments from various groups around the world but the situation is still uncertain to say the least. The fall in the oil price is having a detrimental impact upon growth prospects for the worldwide economy although some local economies could benefit in the short to medium term.
However, some experts believe that the oil price fall could create opportunities in real estate markets which depend upon oil for employment.
Has the fall in the oil price been overdone?
At this moment in time there is a relative glut of oil against a rather benign worldwide economic outlook. This is the main reason why oil prices have fallen so dramatically of late and while some experts believe they will bounce very soon nothing is certain where the price of oil is concerned. OPEC has historically been a very difficult association to read with many vested interests and behind-the-scenes lobbying impacting supply decisions in the short to medium term.
Alex Salmond, the former SNP leader, recently suggested that the price of oil will “obviously recover” but when you bear in mind that his economic blueprint for an independent Scotland was based upon oil at $113 a barrel, even he got it wrong!
Pressure on property prices
There are many areas of Canada and the US for example where oil is king and literally the be all and end all of local economies. Indeed there is a similar situation in the UK with Aberdeen seen by many as the oil capital of the UK having created a real estate market detached from the rest of the country. It is no surprise to learn that demand for properties in these particular oil-rich areas has fallen of late with many experts believing there could be worse to come. Demand is falling and supply is rising which is to all intents and purposes the worst-case scenario for struggling real estate markets.
It may be that the price of oil will go lower before it recovers but perhaps the knee-jerk reaction of some investors and homeowners in these oil-rich areas has been overdone?
Is this an opportunity to buy real estate?
If you’re looking to buy real estate in areas where the local economy is heavily dependent upon oil there may well be some opportunities with unemployment rising and individual wealth under pressure. How long this potential window of opportunity remains open is anybody’s guess because the oil price could recover at any time or indeed it could get worse.
To purchase property in these oil dependent areas purely and simply because of the recent oil price fall is perhaps not a great investment strategy. The fact is that you need to be aware of the local community, local real estate market and the prospects for the region in the long term. It may well be we will see a relatively quick bounce in real estate prices but the reality is we need to see recovery in confidence before this will occur. Even a short-term bounce in oil prices may not be enough to convince those looking to jettison their property assets or indeed tempt those waiting on the sidelines back into the marketplace.
There is no doubt that the fall in the price of oil over the last six months has impacted investor confidence in areas which are dependent upon this commodity. Whether or not this is a short-term blip in the long-term price of oil remains to be seen but it is beginning to have an impact upon investor confidence in areas so heavily exposed to oil. There may well be opportunities to pick up relatively cheap real estate due to a lack of demand and an increase in supply levels in the short term. However, whether or not there will be enough of a bounce to make a reasonable return, as and when the oil price recovers, remains to be seen.
If you have long-term confidence in a particular region and for some reason the local market experiences a short-term phenomenon then maybe this could be a perfect opportunity to invest? However, you need to be fully aware of the underlying economy, the prospects for the region and not just focus wholly upon the price of oil.