How oil and gas affect the real estate market

How oil and gas affect the real estate market
How oil and gas affect the real estate market

ISLAMABAD, 30 May 2016:  Since Pakistan is one of the main net importers of oil, a drop in fuel prices on a global scale is bound to make an impact on the economy. What effect has a drop in oil and gas prices had on Pakistan’s real estate market?

 

How important is the price of oil and gas to Pakistan’s economy?

Almost all countries in South Asia are net importers of oil and therefore, their economies are greatly affected by the price of fuel. According to a report on dawn.com from 2015, “oil prices dropped by over 50pc in the international market between June 2014 and June 2015, but Pakistan’s import bill did not reflect a significant decline”. As oil imports account for approximately one third of Pakistan’s import bill, industry experts believe that falling oil prices will have a positive impact on Pakistan’s economy. To give an overview of the significance of oil imports, Pakistan’s net import bill for 2013-14 was $12.6 billion, approximately five percent of the country’s GDP (according to a report in Pakistan’s Tribune).

 

Is a drop in oil prices positive or negative for Pakistan?

The International Monetary Fund (IMF) predicts that if oil prices remain low, Pakistan could save a total of $12 billion in the next three years. This money could be spent on improving local economic conditions and country-wide infrastructure problems. The World Bank Vice President for South Asia, Annette Dixon states: “Savings from reduced subsidy bills could be used to address the crying needs of the region in terms of infrastructure, basic services and targeted support for the poor.” Therefore, now is the ideal time for the government to implement structural reforms and fully benefit from this drop in oil prices.

 

How does this trend affect real estate in the region?

Improving Pakistan’s infrastructure thanks to savings from oil and gas would be highly beneficial for real estate. As a country’s infrastructure improves, it becomes a more attractive prospect for investors. When oil imports increase due to lower prices, food imports also increase. Indeed, Pakistani food imports jumped to $4.624bn during 2014-15 from $3.913bn in 2012-13 (Dawn).  With an improvement in basic public services, and the possibility of reducing property levels, FDI would increase, particularly in the real estate sector. According to Lamudi’s survey of local house-hunters, 43 percent of respondents believe the availability of cheap oil has not changed their consumer spending patterns. However, a quarter of those surveyed reported that their investment in real estate has increased as a result. A further 15 percent spent more on consumer goods and five percent of the respondents have invested more in stocks.

When is a drop in oil prices bad news for real estate?

In areas which depend on oil and gas as their main industry, a fall in prices can be a problem, especially when refineries and plants close down and there are redundancies. When there are a great number of redundancies, the real estate market tends to suffer. Pakistan also exports some oil and so should oil prices fall too low, this would be problematic for the real estate sector in oil production areas. According to Trading Economics, “Crude Oil Production in Pakistan increased to 88 BBL/D/1K in October from 87 BBL/D/1K in September of 2015. Crude Oil Production in Pakistan averaged 63.54 BBL/D/1K from 1994 until 2015”.  When it comes to whether falling oil prices are a good or a bad thing, it’s a delicate balance. CNNMoney recently reported “For states with economies tied to the energy sector, lower oil, gas, and coal prices can bring layoffs, belt tightening, and less demand for housing.” When there is less work in an area, the demand for purchasing homes plummets, and this is bad news. On the other hand, Pakistan’s imports are greater than its exports in the energy sector, and so the negative effects of low prices are counteracted.

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