How Persistently High Oil and Gas Prices Could Affect Luxury Real Estate

As anyone with a car will likely have noticed, oil and gas prices have been at record highs lately. Prices, which had already been steadily rising since the height of the pandemic, shot up shortly after Russia invaded Ukraine in February.

It followed a dip during the pandemic, when global activity ground to a halt. As vaccines were rolled out, lockdowns lifted and economies recovered, energy prices had begun to creep upwards too. Then the war began and the U.S. and other countries announced bans on, or reductions of, Russian oil and gas imports. Brent crude hit $127.98 on March 8, up from $68.87 in December 2021 and $19.33 in April 2020.

More recently, natural gas prices have been hovering near 14-year highs, while oil prices, which came off their early March highs, have again been edging up. A gallon of gasoline in the U.S. cost $4.10 last week, up 43% from a year ago.

It appears the elevated prices will linger for some time. And that could have significant impacts on the housing market, including luxury markets in New York City, London and elsewhere around the world.

From rising inflation and interest rates to a potential new trend in energy-efficient renovations, there is much to consider for prospective home buyers when it comes to long-term real estate planning.

Inflation and Interest Rates

One obvious impact is that higher energy prices feed inflation. In the U.S., the inflation rate rose 8.5% year-over-year in March, its biggest increase in more than 40 years. British consumer price inflation, meanwhile, rose to 7% in March, its highest level in 30 years.

But the worst may be yet to come. According to Olafur Margeirsson, head of global real estate research at Credit Suisse Asset Management, inflation “may even be structurally higher in the future than it was in the most recent past.”

Liam Bailey, global head of research at Knight Frank, said that will lead to slowing  of property price gains through this year.

“This current round of inflation from energy prices…is prompting central banks to raise rates, and that will be something which will slow property price growth,” he said. “We’re already seeing the impact.”

In March, following an increase in mortgage rates, U.S. home sales fell by 4% from the previous month and by 8% compared to March 2021, signaling a cooldown in the market.

For Amanda Agati, chief investment officer at PNC Financial Services Group, this is a “pivotal point” in time as it relates to interest rate decisions by the Federal Reserve, or Fed.

“The mortgage rate being above 5%—that’s a key psychological point for a lot of consumers,” she said. “It won’t destroy demand, necessarily, but it definitely will give home buyers pause at these levels if you need a mortgage to move forward.”

She expects the Fed to increase rates by 50 basis points in May, and 25 basis points in every meeting thereafter this year.

But will that affect the luxury buyers, who often do not need financing? Mr. Bailey said the luxury market is not immune from changes in the cost of debt or the cost of living.

“The mainstream and luxury markets—people sort of move between those markets, and they tend to move in tandem,” he said. “Even in the luxury market, the cost of debt is a significant influence on the price people are willing to bid for properties.”

If it becomes more expensive to service debt—and therefore buyers cannot move as easily, pressuring the lower end of the market—that creates a “stickier” market, Mr. Bailey said, because it prevents people from forming chains.

“So everything begins to slow down slightly,” he said.

Mr. Margeirsson said the luxury market can especially be affected in the short- to mid-term, but that ultimately it comes down to the local economy of a city or real estate market.

“Luxury home buyers and investors should be mindful of the local inflation and interest rate dynamics, for they will play a key role in the mid-term dynamic of the local real estate market,” he said.

Mr. Bailey also said that geography can play an important role when it comes to inflation.

“There’s a big difference between Europe and North America,” he said. “The general view is that the U.S. may be moving towards the end of that process, whereas in European markets, and the U.K., to an extent, we’ve still got some way to go.”

via Mansion Global