How will Oil Prices affect the value of your home?

This seems to be weighing on a lot of people these days.  Homeowners who are thinking of selling, first time buyers looking to get into the market, and just your average person wondering about their investment.  Everyone has their opinion of how the drastic decline in oil prices will affect the Saskatoon housing market, but it's all speculation based on.... opinions.  So how why would you listen to me?  Aren't I just a guy with an opinion?  It's true, I am just a guy with an opinion... and graphs!!!  Like, graphs with actual data on them that might support my opinion!!

First lets talk about oil prices.  Not just today's oil price because we all know it's low.  Let's look at what oil prices have done in the past.

This graph is from www.macrotrends.net, but the fancy red circles are courtesy of yours truly.  What I am crudely pointing out is the cyclical nature of oil prices.  After a time of rising oil prices, the prices fall fairly significantly.  As you can see, it's approximately every 7-8 years.  So what happens to the oil industry at that time?  People lose jobs, gas prices drop, people think the sky is falling, etc.  When this happens, consumers become uncertain as to what's going to happen (sound familiar?).  So let's have a look at the median house sale price in Saskatoon over the past few years.

Thanks for the fancy chart http://creastats.crea.ca/sask/ .  I want to point out the dip in 2009 in the Saskatoon housing market.  It kind of lines up with the drastic drop in oil prices in 2009... interesting.  Is it related?  Possibly, but I think it has to do with over inflated prices of 2008 with the crazy bidding wars and whatnot.  The dip in 2009 is never talked about in the media and I find most people don't know about it.  What that is right there is a "market correction".  You know, that thing the media keeps telling you is coming?  Well we had it.  In 2009.  Since then it's been nice steady growth (around 5%/year) to where we are now.  

*Interesting note: check out the drop in oil prices in 2007 that lasted almost exactly a year. At the very same time we were experiencing unprecedented growth in the housing prices! Oil may have an effect on the housing prices, but it's obviously not directly correlated, as the media would have you believe. 

On the other hand, perhaps the oil industry did play a role in the 2009 dip.  It very well may have as that was a spectacular drop!  But lets look at the drop in oil prices around the year 2000 and compare them to the housing prices.  They stayed very stable but with slight growth.  The prices didn't dip except for the normal seasonal dip.  This is my opinion of what the prices will do over the next year, depending on how long oil prices stay low.  I think we will experience less growth than we have been seeing in the past 5 or so years,  but I don't predict prices to drop.  Buyers will be hesitant to buy, which will cause the amount of inventory to rise.  We are seeing this happen already.  Check out my weekly stats posted on my homepage each week, which shows the stats for last year at the same time as well.  We have about 320 (26%) more listings right now than we did last year at this time.  Surprise chart!


Classic Supply and Demand chart.  My most favorite, simple chart to explain every market.  As supply goes up, demand decreases along with the prices.  So am I saying the prices are going to drop?  No.  I don't think asking prices will drop, but sellers are going to have to realize that there is a lot of competition out there (supply) and they may have to decrease their acceptable selling price, in order to facilitate a sale.  Many sellers won't like to hear this and will be stubborn with their price and not budge.  What this will do is cause our Days On Market to increase so sellers will have to be prepared to have their home for sale, longer.  At the time of writing this, the average is about 50 days on market before a successful sale.  This could potentially move closer to the 3 month range, which is typical for "normal" markets.  So some sellers will accept less for their homes, but many won't.  This should keep prices fairly stagnant, rather than the growth we've been experiencing.  

Fortunately (for housing prices), there are a lot of investors out there who would love prices to drop. Prices increased in 2007/2008 because of investors coming in from out of province and buying everything they could. If prices were to drop a little, the investors will come out of the woods again and start buying up properties. Of course, this is speculation... I don't have a fancy chart to back this one up.

The government doesn't want to see prices drop and neither do the banks.  It does not help our economy at all.  This is why we are seeing record low interest rates.  It allows housing to remain affordable and lowers the barrier of entry for a lot of first time buyers, which keeps the market.  "But what if interest rates go up?!".  Oh they will!  They always do.  But, if you take out a 5 year fixed term mortgage (most common mortgage term), you will have paid off a good amount of your mortgage in the 5 years.  So you should have a nice chunk of equity built up by the time mortgage renewal rolls around.  Example time:  If you bought a $350,000 home with 5% down and a 5 year term at 2.79%, after 5 years your mortgage would be reduced to about $283,000.  Let's say prices have not changed and after 5 years, unfortunately your home is still only worth $350,000, you would now have 20% equity in your home.  Not bad!  

Keep in mind, I'm completely biased as I think real estate is one of the best investments a person can make.  I wouldn't own properties or be a Real Estate Agent if I didn't think so!  But remember that the media is biased too.  Sometimes a person needs to hear both sides of a biased story...

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Ryan Souster

Ryan Souster

REALTORĀ®
CENTURY 21 Fusion
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