The impact of inflation on energy costs was already being felt before the conflict between Russia and Ukraine, but new sanctions restricting fuel exports are now exacerbating the problem and causing gas prices to rise. While it may not seem like real estate and high gas prices go hand in hand, they are much more connected than you think. Here’s how skyrocketing fuel prices could affect the real estate market in the short and long term.
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Gas prices are on the rise
Gasoline prices are one instance where consumers can see the immediate effects of rising cost. Even a week difference means you pay more for a regular top up. According to the AARP, the national average price of regular, unleaded gasoline has risen 17% in the past month alone. It is estimated that increased gas costs could add up to $2,000 to the average household budget this year.
Not only does this affect Americans as they refuel their cars, but it also causes companies that ship and deliver goods to have to adjust their prices to offset rapidly growing fuel costs. Energy costs for heating or home energy are also affected by higher fuel and oil prices, all of which are transferred to a higher bill for consumers. Until oil production is increased, helping to relieve a supply-strapped market, this problem is only likely to grow – which means gas expenditures will likely continue to rise.
Correlation between real estate prices and gas
The housing market is driven by supply and demand. Limited housing supply and recent high demand, thanks to favorable mortgage terms such as low interest rates, have pushed home prices to record levels. Over the past year, home prices have increased by 19% on average while rental rates have increased by 12.6%.
Double increases in the cost of housing when wages increase by about 4.5% put significant pressures on those with low to moderate incomes. Add to this the rising cost of everyday goods such as food and petrol, which have increased by 7.9% and 38% respectively over the past year, and the growing problem becomes quite evident. The skyrocketing prices of fuel and oil mean that people cannot afford lower costs, restricting consumer spending.
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Impact on real estate
Real estate in areas where people travel for a long time, such as the suburbs, may see lower demand as people struggle with rising fuel costs. Fortunately, with many people still enjoying the freedom to work from home, long commutes are not as much of an issue as they were in the recent past. Instead, we are likely to see a direct correlation between higher gas prices and lower housing demand.
The Federal Reserve has put in place a plan to raise interest rates several times this year in an effort to combat rising inflation, which in turn will lead to higher mortgage interest rates. Higher interest rates mean that people have to buy real estate for less money in order to make the same monthly payment they would make on a lower interest loan.
As people tighten their budgets, they will have to decide where they spend their money. Savings that might have been earmarked for buying a home can be used to help people float temporarily until inflation goes down and things like food and fuel costs. This could mean less spending in stores and online, which could negatively impact commercial or industrial real estate, as well as less money spent on vacations and leisure activities, which could negatively impact hotels, short-term vacation rentals and entertainment venues.
While the housing shortage certainly continues to fuel the price growth fire, I expect gas prices as well as inflation and higher interest rates to combat that in the near future, lower demand and help prices calm.
