How Gold, Oil & Interest Rates are Currently Affecting Real Estate
The commercial and residential real estate markets can be affected by the price of gold and oil, and interest rates too. Typically, a higher price for oil means more money is invested in commercial real estate, while lower interest rates attracts more buyers to the residential market.
Thanks to an increase in the price of gold coupled with plunging oil prices, the gold crude ratio – a measure of how many barrels of oil that can be bought with a single ounce of gold – currently has a higher gap than normal at 27x, as of July 2017. This ratio signifies that 27 barrels of oil will cost roughly one ounce of gold. Given the price activity in oil over the past few years, the ratio has experienced large swings while gold has held steady, indicating crude oil should be trading around twice as high than its current price in order to maintain its historic price relationship with gold.
Another indicator affecting the real estate market is the interest rates. With almost a decade of historically low interest rates, there was a lot of talk about Canada’s central bank raising rates in July and they did. The Bank of Canada raised their rates from 0.25% to 0.75% on July 12, 2017 and the five big banks soon followed. Since the increase, gold has dropped only roughly 0.58%, which really isn’t very much. Most experts believe that if interest rates go up higher, the price of gold will drop; however, gold prices have remained steady so far.
Therefore, despite the fact the price of crude oil has dipped and interest rates have been on a slight uptick, gold remains fairly unaffected. This could be some sign of change, as crude oil prices are expected to increase from its very low price per barrel. Many believe gold will come down as a response to this increase; however, not enough to get it back to the 15:1 gold crude ratio.
How does this All Affect the Real Estate Industry?
When oil goes down, it has an impact on everything else throughout Canada, as it’s one of the leading industries. Dropping prices tend to mean that economic growth is weak, which make investors worried. The fear of weak growth and slowdown across the globe, also leads to more sale activity amongst investors. For those who watch the trends, this indication also means it will soon be a great time to invest, as prices may be lower than normal.
Gold prices don’t seem to have nearly the impact on the real estate market as oil and interest rates does. However, when interest rates are down, generally there are more investments into commercial and residential real estate. As rates increase, there will be fewer buyers in the market; however, the ones that are buying will likely be financially qualified buyers.
The ratio of an ounce of gold compared to a barrel of oil is nearly double the historical average, while interest rates are on the way up. These factors will likely have an impact on both the commercial and residential real estate market. Most notably in the recent increased buying activity as the prices are becoming more attractive to the seasoned investor.