Recent headlines have been dominated by the volatility of global crude oil prices. In early February, oil prices hit a 52-week low at around USD 44 per barrel, more than 50% down from a 52-week high of around USD 100 per barrel in mid-2014. While prices have recovered slightly to USD 47 per barrel as at the time of publication, the huge decline in oil prices has varied effects for different firms and industries.

Over the past 20 years, historical data has shown that the Singapore residential market appears to have some correlation with oil prices. With the recent decline in oil prices, could this lead to further decline in the housing market?

URA Property Price Index and Rental Index versus Brent/WTI crude oil prices
Source: Bloomberg, URA, JLL Research, February 2015

During the Asian Financial Crisis (1997-1998), oil prices halved, from USD 23-25 per barrel to USD 10-12 per barrel while residential prices and rents in Singapore declined by 44% and 37%, respectively. The financial crisis resulted in falling oil prices, caused by a huge decline in demand as consumption slumped, leading to a regional economic slowdown that adversely affected Singapore. Residential prices and rents fell as buyers’ confidence in employment prospects dwindled.

In the current situation, the plunge in oil prices stemmed from a battle for market share between Saudi Arabia and US shale producers. While oil prices have fallen by around 50% since 4Q14, Singapore residential prices and rents have both declined approximately 1%. However this contraction in the housing market began as early as 2H13 and was triggered by a slew of government cooling measures. The effect of current low energy prices on the residential market has not yet been felt. Anecdotal evidence from our leasing colleagues suggests that oil and gas companies remain one of the major drivers in the local rental market, accounting for 15-20% of demand among corporates and expatriates. Lease renewals by these companies have not witnessed any decline and have been at the same, if not higher rents.

Seemingly, the historical visual correlation between the oil price movement and residential market trend in Singapore is not always applicable. The recent movement in these two sectors is largely coincidental and driven by different factors.

However, a further drop in oil prices could pose a risk for the Singapore housing market. According to DBS research, low oil prices have started putting pressure on oil majors and drillers. Key players such as Transocean, Seadrill, Statoil and Petronas have announced cuts in capital expenditures and dividend payouts, a tightening of operating expenses and a reduction in rig fleets. The oil and gas industry is one of the major contributors to Singapore’s economy and expatriate demand for housing could see a slowdown should conditions take a turn for the worse.

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