BK Perspective Real Estate USA 2016

Perspective on Real Estate 2016 - U.S.
Commodity prices tumble
Fears surrounding the health of the Chinese economy,
as well as other emerging markets like Russia and
Brazil have contributed to a major rout in commodity
prices with lows in 2015 not seen since the Global
Financial Crisis. Both base metals and agricultural
commodity prices have been hit hard over the past
year but it has been the 50%+ plunge in crude oil
prices since the summer of 2014, that has been most
surprising to financial markets.
While slower global demand has certainly contributed
to oil’s massive fall, we highlighted in last year’s
Perspective that a major factor has been a growing
glut of supply. Thanks to OPEC’s reluctance to cut
production quotas and the shale revolution in North
America which has significantly increased supplies
of non-traditional product, the world has simply
become awash in oil. Although U.S. shale production
has eased, many forecasters believe that supply and
demand forces will keep the real level of oil prices
below its long term average of $50/bbl over the next
few years (see Fig. 2.2) – a surprising turn of events
Fig. 2.2
WTI Oil Price
$ per bbl
120
100
80
60
40
20
0
WTI in Nominal Dollars
WTI in 2015 Dollars
LT Average in 2015 Dollars
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: IMF, Bentall Kennedy
considering that it was just eight years ago when
“peak oil” theories and prognostications of $200/bbl
were at their zenith.
Two notable casualties of the commodity price
downturn have been the resource-dependent
advanced economies of Canada and Australia.
Coming out of the financial crisis several years
ago, both countries were among the strongest
performers in the advanced world, benefitting in
part from a rebound in commodity prices on the
back of a stimulus-driven Chinese economy. But
with commodity prices sinking, both Canada and
Australia have suffered significant “terms of trade”
shocks 1 , slumping currencies and a sharp reduction
in investment intentions. This sudden deterioration in
economic conditions prompted central banks in both
countries to cut interest rates in 2015, moves which
have placed additional downward pressure on their
currencies but also inadvertently provided further
support to their already very robust housing markets.
The main intent of these looser monetary conditions
is to support a transition of growth drivers to other
sectors of each economy. In particular, Canada’s large
non-commodity export sector is expected to reap the
benefits of both a lower exchange rate and growing
demand in its largest trading partner, the U.S. (see
next section).
Larger advanced economies lead the way
With much of the global economy struggling,
larger advanced economies have been holding
up comparatively better, supported mainly by
strengthening domestic fundamentals. In fact, robust
job gains and tightening labour markets have led
to rising wage growth in both the U.K. and U.S. In
an inversion of the events surrounding the Financial
Crisis eight years ago, these advanced economies will
likely be the pillars of global growth in the near term
1
“Terms of Trade” is the ratio of export prices to import prices. When
export prices fall sharply relative to import prices, this shock results in a
significant loss of capital for a country.
12 | Bentall Kennedy (U.S.) Limited Partnership