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Examining the Connection Between Oil and Housing Prices

The dropping price of oil, and its effect on the Canadian housing market, was a topic touched upon in the last article published on January 27, entitled, The Two Factors That Will Decide Toronto’s Housing Market in 2015. But, we here at iHomes thought it necessary to explore the topic in more detail. To offer up more than just a quick overview of the effect a decline in oil prices may have on resale housing prices, and instead, examine some of the theories offered up by financial analysts and economists on the connection between oil and real estate.

A lot of attention is being paid online to a recent Royal LePage house price survey and market forecast, which they publish annually, released on January 14. Susan Pigg of The Toronto Star, offers up her synopsis of this report. Initially, LePage predicted housing price increases average 2.9% across Canada, moving the average price of a home to $419,318, up from $407,500 last year. The report highlighted Toronto specifically, predicting that the GTA would experience the highest percentage growth in housing prices compared to 2014, with an expected increase of 4.5%, bringing the average resale price of condos and houses combined across the GTA to $592,000 — up from $566,500 in 2014 and $524,089 in 2013.

Royal LePage would later revise its forecasts, having to account for the deepening slide of oil prices. According to Royal LePage chief executive officer Phil Soper:

“In the immediate term we anticipate that the natural slowing of home price appreciation we called for in the third quarter of 2014 will be delayed in Central Canada and accelerated in the West by recent developments in the energy sector.”

But why is Western and Central Canada more susceptible to declining house prices resulting the declining value of crude? Chris Matthews of Fortune, has one possible answer, making the argument that if declining oil prices are expected in the long term, we can also expect to see home values “in markets with a high concentration of energy sector jobs,” also to decline. Referring to historical trends in the U.S. housing market, Matthews quotes Trulia Chief Economist Jed Kolko, who contends that oil price drops have historically been associated with job losses and falling home prices in energy-producing regions. The chain reaction that Matthews and Kolko are alluding to is not one that is difficult to decipher. Those working in regions that are heavily dependent on the oil industry, face a greater risk of losing their jobs when labour costs need to be cut in order to compensate for the declining value of oil. Fewer employed adults means fewer potential homebuyers, leading to declines in the price of homes in order to draw in buyers who may be on the fence. Michael Babad of The Globe and Mail, suggests that such changes are already taking place in Alberta, causing both job cuts and major project delays.

It isn’t all bad news when it comes to slumping oil value. Soper noted that dropping oil prices make it far less likely that interest rates will rise, which will benefit homebuyers nationally. Babad claims that potential homebuyers in Ontario stand to gain from oil price decline, getting to enjoy the subsequent depreciation of the Canadian Dollar.