Commodity prices are driving up house prices

Amberman

and they will underpin them...iron, copper, oil etc have zoomed in price.....discuss.

DonJose

But if nobody buys, then this happens

http://www.boards.ie/vbulletin/showpost.php?p=54891276&postcount=4091

Amberman

for a while, yes, but eventually, prices of houses and commodity prices converge....the long term house price equals the build price (commodity and labour) plus an adequate return for builders...thats the norm...the only long term unknown in the equation is how much the builders charge...the rest is predictable based on commodity and labour prices...and fewer builders means less competition and higher prices in the long run until super normal profits bring in more competitors. Therefore you are right, but also wrong...the difference is time scales.

The_Conductor

Then its just as well that commodity prices are all down from their highs and projected to keep falling. Oil is comfortably below $90/barrel again, coffee futures has fallen back by 12% in the last week (to about $128/tonne) and gold looks to be heading back towards a $800/ounce point of stability. At the end of the day- its a supply and demand situation- and the global economy is in danger of constricting- reducing demand for all commodities- thus dampening their prices.

Amberman

You are right that they have had pullbacks recently, but these are run of the mill pullbacks in price due to across the board selling to meet stock market margin calls and we have seen this many times already in this bull...all boats sink when the tide goes out...theres a lot of very tight and in some cases shrinking supply in commodity markets right now, especially oil. Oil is $91 barrell in New York and gold is about $880...so Im not sure I get your point there.

I believe in peak oil and think that even if they wanted to, OPEC couldnt increase production by a meaningful amount, say 5m bpd within a week. A few hundred thousand barells a day is meaningless window dressing. Thats why I think oil could go many times from here. At some point, those oil prices, (which drive up all other resource hungry commodity prices) have to underpin the property market IMHO (unless there is an overhang of supply to be worked through first).

You are right when you say its a supply and demand situation, but these markets are made very complicated by investor speculation, inflation hedging and dollar divesting which are totally skewing the utility value supply demand position in many of these commodity markets right now.

I think house prices will overshoot on the downside in this crash and commodity prices will overshoot on the upside in this boom, both positions are the norm...and that could give the housing market a very fast recovery when it hits its lows for a reason we havent seen before.

The key question is how strong is the 'gravitational pull' of commodity prices when compared to wages, rents, interest rates, inflation and greed/fear in determinining the value of house prices?

Victor

In the short to medium term, commodity prices only affect the price of construction. Interest rates, repayment ability and confidence levels still dictate house prices. If the price of constructing a house approaches the sale price of a house, builders just stop building.

astrofool

Just on oil, the problem there is in refining capacity due to under investment during low oil prices, rather than there being a problem with the supply of crude.

Oil will start dropping again in the next few years, as extra capacity begins to come online, and the fallout in some countries (Venezuela, Russia), is not going to be nice.

SimpleSam06

Amberman wrote: »

and they will underpin them...iron, copper, oil etc have zoomed in price.....discuss.

This is making the assumption that house price rises had much to do with commodity prices in the first place.

bbbbb

Amberman wrote: »

and they will underpin them...iron, copper, oil etc have zoomed in price.....discuss.

The cost yes, but as we've seen in the last 10 years or so, house prices have little to do with cost.

D'Peoples Voice

Amberman wrote: »

and they will underpin them...iron, copper, oil etc have zoomed in price.....discuss.

there is so much I could write on this, but I won't as it will make the thread too long.
Commodities are priced in US DOLLARS, while their prices are at an all time high, it's because the US dollar is at an all time low, so the net effect to countries in the euro area is exaggerated. In fact, people purchase commodities as a hedge against a falling dollar, so people outside the US dollar area are somewhat protected to a large degree.

Thatching rooves became expensive, did that increase the price of a house? Look at the price of traditional limestone based concrete, as it's price increases with the price of energy, more people will move to Ecosmart concrete(http://www.constructireland.ie/articles/0212cement2.php).
Alternatively they will move to more wood frame houses. Make no mistake, substitutes products will be found.

Victor

D'Peoples Voice wrote: »

it's because the US dollar is at an all time low,

Compared to recent rates, yes, but long term historically, no.

D'Peoples Voice

Victor wrote: »

Compared to recent rates, yes, but long term historically, no.

LOL
yes, I meant an all time low AGAINST the euro, since Janaury 1999,
obviously not against the DEM, IEP or FFR prior to that date.
we are all familiar with the weakness of the dollar during the Vietnam War and in the recession of the early eighties, but I'm only comparing it against the euro in this discussion.

Firetrap

SimpleSam06 wrote: »

This is making the assumption that house price rises had much to do with commodity prices in the first place.

That's what I think as well. House prices went up because builders kept putting up the price and people kept buying them.

Amberman

Victor wrote: »

In the short to medium term, commodity prices only affect the price of construction. Interest rates, repayment ability and confidence levels still dictate house prices. If the price of constructing a house approaches the sale price of a house, builders just stop building.

If you are saying that builders make decisions because of commodity price rises and their interaction with house prices, I agree. When build cost equals sale price, there is no incentive and supply tightens.

What directional pressure does that scenario normally exert on put on prices in a growing population?

Amberman

SimpleSam06 wrote: »

This is making the assumption that house price rises had much to do with commodity prices in the first place.

Why is it making that assumption?

I am looking forward to try and identify the fair value level/floor in this crash...this outlook has nothing to do with growth, it has to do with identifying value based on repalcement cost, for want of a better term.

Amberman

D'Peoples Voice wrote: »

there is so much I could write on this, but I won't as it will make the thread too long.
Commodities are priced in US DOLLARS, while their prices are at an all time high, it's because the US dollar is at an all time low, so the net effect to countries in the euro area is exaggerated.

The euro effect may be exaggerated, which it is compared to the dollar, but you seem to imply that its non existent...it isn't. My apologies if that isn't your implication.

If commodities price changes are solely down to the dollar, the commodities woudn't have changed much in euros and the dollar would have slid further V the euro.

Gold and oil have both roughly doubled in 4 years in local currency.

http://www.the-privateer.com/chart/g-multi.html

There are other factors at work here.

Amberman

astrofool wrote: »

Just on oil, the problem there is in refining capacity due to under investment during low oil prices, rather than there being a problem with the supply of crude.

Oil will start dropping again in the next few years, as extra capacity begins to come online, and the fallout in some countries (Venezuela, Russia), is not going to be nice.

Theres a real good reason this very clever multi trillion $ industry hasn't built more refineries...they're not needed cos there isn't the oil to refine. No extra refinery capacity has been added globally since the 70's. That should tell you a lot.

astrofool

Amberman wrote: »

Theres a real good reason this very clever multi trillion $ industry hasn't built more refineries...they're not needed cos there isn't the oil to refine. No extra refinery capacity has been added globally since the 70's. That should tell you a lot.

lol, that's not even remotely true, a quick read up on this from the multiple sources across Google (http://www.google.ie/search?hl=en&q=world+oil+refining+capacity&btnG=Google+Search&meta= ) without mentioning the numerous articles in papers around the world that foretold this problem before the oil price started increasing.

You don't see any corrolation between the historical low oil price and the capital investments made by oil companies? You have to be completely deluded if that is the case.

D'Peoples Voice

Amberman wrote: »

The euro effect may be exaggerated, which it is compared to the dollar, but you seem to imply that its non existent...it isn't. My apologies if that isn't your implication.

If commodities price changes are solely down to the dollar, the commodities woudn't have changed much in euros and the dollar would have slid further V the euro.

Gold and oil have both roughly doubled in 4 years in local currency.

http://www.the-privateer.com/chart/g-multi.html

There are other factors at work here.

Apologies, I'm not making myself clear,
if you look at the link you provided,
the price of gold has risen about 57% since 2003 (550/350), no small amount I can tell you,
BUT
the price of gold in US dollars has risen 183% since 2003 (850/300).
what I'm saying is that although commodity prices have risen,
the weakness of the dollar is making them somewhat MORE tolerable but yes still difficult to absorb into your margin.

Amberman

astrofool wrote: »

lol, that's not even remotely true, a quick read up on this from the multiple sources across Google (http://www.google.ie/search?hl=en&q=world+oil+refining+capacity&btnG=Google+Search&meta= ) without mentioning the numerous articles in papers around the world that foretold this problem before the oil price started increasing.

You don't see any corrolation between the historical low oil price and the capital investments made by oil companies? You have to be completely deluded if that is the case.

I do see the correlation, but its not the issue here...peak is the issue. Oil discoveries have been in decline for 40 years...with all our modern technology, we aint finding squat compared to the past. So if we can already refine all the oil we can pump, and we aren't finding more oil to replace what we are using up at an accelerating rate, and if most of the world is in agreement about the fact that we are close to the peak, or even past it...what the hell is the point in building another refinery? Would you?

Well, going from 80 odd to 85 Mbpd in refining capacity isnt a large rise in 25+ years, but it is a rise...given, not big considering that demand hes gone from 60+mbpd to 82+mbpd...but you are strictly correct. I don't consider this to be significant and perhaps I was a little flippant. Apologies. The world will NEVER pump and refine 90mbpd

I do think the oil companies are really smart and that they plan well into the future, by decades. Theres a good reason BPs logo is now a sunflower...;)

http://environment.newscientist.com/channel/earth/energy-fuels/mg19626273.900-depleting-oil-supplies-threaten-meltdown-in-society.html


If you cant see the correlation between sunflowers, peaks, wars, constantly falling discovery rates, increasing demand and tiny increases in refining capacity, well, I wont call you deluded...I'm a nice guy.