Oil Prices Impact Real Estate Market on Different Levels

One of the greatest diffusers of any argument over time has been “What’s that got to do with the price of eggs?” Today’s non-sequitur may well be “What’s that got to do with the price of gas?” except that the answer is most likely “plenty.”

A lot has been written lately about the effect the rapid decline in world oil prices is having on the economy of Alberta, but the same also holds true for provinces such as Saskatchewan and Newfoundland and Labrador. Meanwhile the slumping oil market may end up as a positive in provinces such as Ontario.

Alberta has depended heavily on the petroleum industry for over a century, and has ridden the oil drilling wagon for seven decades. As oil pockets were depleted and reserves dwindled, the province has relied on exploration of new resources over the past decade. In effect, the slide in oil prices encourages the spending of money into exploration, which may offset the economical impact of falling prices.

Regardless, there’s bound to be some job losses and the resultant need for housing, and therefore a drop in the real estate market. The uncertainty of potential job losses also leads people to hold onto their money more tightly and results in a drop of property purchases. All of these scenarios lead experts to predict a slowing real-estate market in Alberta. And it can be followed that it also applies to Saskatchewan (Canada’s second leading oil extractor), Newfoundland, and Labrador.

However, the news is not expected to be so much negative as “not as positive” as we would like. According to the recent Royal LePage House Price Survey and Market Survey Forecast, the average Canadian home price grew modestly during the fourth quarter of 2014 (up between 4.5 and 6.7 percent from the previous year). That’s good news.

The survey expects prices to rise by 4.5 percent in the GTA, followed by Vancouver at 2.8 percent, with Edmonton and Calgary also falling below the national average price increase (2.9 percent).

The bittersweet news is that it isn’t expected to drop but may not grow as much in 2015; and certain parts of the country may see a flat market. According to a story on the Global News website, Calgary and Edmonton are beginning to be particularly hard hit by the rapid oil-price drop, with new Calgary property listings rising by 42 percent and sales dropping by 7.5 percent. In other words, more owners are rushing to sell their properties but fewer purchasers are actually stepping up to buy. A similar scenario holds true for Edmonton.

But in Toronto, average prices are expected to stay on the rise, with pent-up demand from potential buyers who were on the losing end of the bidding wars of 2014. Buyer confidence is also on the upswing due to lower prices at the pump. You could argue that many consumers will likely invest in a larger vehicle, rather than a larger house, but the ability to spend less on automotive fuel week to week is also a prime motivator to take on a higher housing payment month to month.

Another survey, the Teranet–National Bank National Composite House Price Index, paints a similar picture with Toronto expected to grow modestly thanks to the low dollar value, low pump prices and low mortgage rates, while markets east and west of the Golden Horseshoe expected to grow considerably more slowly because of slowing demand and excess supply.

What it all means is that we in the GTA, and in Toronto in particular, may actually benefit from the near-term market forecast for declining oil prices and actually increase our development and homeownership.

This year is definitely off to an interesting start.