Lessons from previous oil shocks
We’ve had oil shocks before, this isn’t the first time. But it could very well be one of the last. This shock comes at a time when there are more alternatives to oil consumption. Electric vehicles (EV) are now a credible option for many passenger vehicles and this shock is likely to exponentially accelerate adoption, once the dust settles.
Tesla and BYD drivers are having the last laugh (after years of being ridiculed). Your author being one of them.
Many developed economies have also been diversifying their own energy resources. The US is now a net exporter, having learnt important lessons from previous shocks. Australia is leveraging its LNG position as the Saudia Arabia of the Pacific.
Oil was trading at very low levels before this shock, particularly relative to gold and silver. So there was a bit of complacency around before this shock, but important lessons learned for the future.
My key focus over the past week has been elsewhere. I’ve been thinking about the real estate ramifications of this war, particularly on the Australian residential market.
Property prices during oil shocks
In 1973, OPEC cut oil supplies and the price of crude roughly quadrupled overnight. Inflation in Australia surged to 17.6%. Mortgage rates doubled from roughly 5.9% to 10.4%.
By every normal measure, property should have collapsed.
Instead, Sydney median house prices almost doubled from $18,700 in 1970 to $36,800 by 1976. Across the five major capitals, values rose between 34% and 83% over the same period.
When oil spiked again in 1979 after the Iranian Revolution, Australia tipped into a recession with high unemployment. Property still came out the other side stronger. And it's kept happening.
Black Monday, the dot-com crash, the GFC, COVID. Even during the GFC, the most severe financial shock in modern history, Australian house prices rose 6 to 12% between 2008 and 2011 while the ASX dropped 30%.
Supply likely to get worse
The key driver holding up prices will be the impact to supply. I’m already starting to see feedback from my industry contacts suggesting building material costs are rising, due to freight disruptions. This will likely continue in coming months. Its systemic and will get built into the cost base.
The second factor is funding costs for developers, another 50bpts to funding will further distress the feasibility of many projects, many of which were already on thin margins.
Despite all the government rhetoric, state and federal, we are still yet to see any meaningful increase to housing supply in Australia relative to our demand needs.
So while demand might soften, supply will soften more, supporting house prices at current levels.
25,000 Aussies in the UAE
Another factor worth considering is the repatriations. DFAT estimates around 25,000 were living in the United Arab Emirates prior to the conflict and up to 100,000 Australians across the Middle East region. I suspect a large portion of them may come back home and bring their mostly tax free wealth back with them.
This could add further demand into the market, offsetting the margin investor who is priced out from rate rises.