Warning out on possible real-estate bubble

Posted at 01/07/14 8:08 AM

MANILA - An economist on Monday raised the specter of a real-estate bubble in the Philippines if the property sector continues its high-speed growth of 15 percent to 20 percent in the medium term.

In a briefing by the First Metro Investment Corp.-University of Asia and the Pacific (FMIC-UA&P) Capital Market Research initiative on Monday, UA&P Associate Prof. Victor Abola said the growth of the real-estate sector, while a positive sign that the economy is also growing, could still be a threat to the country’s economic growth in the next three to five years.

“There’s an oversupply in the higher-end of the spectrum, but it’s a very small percentage, it’s about 5 percent to 10 percent. However, the reports we get is that banks are already starting to feel past dues and defaults and, of course, that needs more stringent requirements, apart from the bank, the BSP [Bangko Sentral ng Pilipinas], which is what we’ve been calling for since a year ago,” Abola said.

A bursting of a real-estate bubble would immediately lead to huge simultaneous drops in property prices. This, in turn, would immediately affect owners of property assets who would be left with assets having values much less than the time these were bought.

As investors see the value of their investment getting exposed to higher risks, the option of pulling out of the market becomes attractive. The pullout further feeds the beast, and the bursting of the bubble then leads to a financial crisis, as banks and creditors would be left holding soured assets.

However, Abola said the growth of the residential construction in the 2007-to-2012 period has not been as steep as the 1992-to-1996 period prior to the 1997 Asian Financial Crisis.

Abola added that even if mortgage rates increase by 3 percentage points, families would still be able to pay back their bank loans that were used to purchase houses both in the socialized and low-cost sectors.

“When real-estate companies start off with zero interest rate and zero down payment, then that’s a harbinger of possible trouble. [But] I think the bubble will be avoided [since] the banks have learned from the Asian Financial Crisis,” Abola said.

Apart from a possible bubble in the medium term, the robust growth of the Philippine economy will also be threatened by a “hard landing” of the Chinese economy.

Abola said the Chinese economy is expected to post a slower growth of 7.2 percent and “structural problems” may crop up in the Chinese economy in three to five years.

However, Abola said issues on the Chinese economy, particularly slower growth, were not a very grave threat to the economy. Even if it slows to 7.2 percent, Abola said this was “still good” considering that a growth of above 7 percent was still high compared to other countries worldwide.

China is one of the country’s main trading partners. In September 2013, revenue from country’s exports to China reached $653.88 million, generating a total trade value of $1.311 billion and $3.69-million trade deficit.

Imports to China in September 2013 amounted to $657.57 million, an increase of 0.8 percent from $652.13 million in September 2012. Exports, on the other hand, reached $653.88 million in September 2013, a 23.2-percent growth from $530.61 million in same month last year.

“Despite the country’s strong economic fundamentals, yields will still be subjected to external yield movements, mainly by the US. Supply and demand dynamics will be dictated by foreign flows rather than local
liquidity,” First Metro President Roberto Juanchito Dispo added.

Data showed that in the third quarter of 2013, the total value of construction projects reached P71.4 billion. Around 51.7 percent, or P36.9 billion, was spent for new residential-type buildings, while nonresidential construction was worth P29.7 billion, or 41.6 percent, of the total value of construction.

Combined value for additions, alterations and repairs of existing structures was registered at P4.8 billion, or only 6.7 percent, of the total.

The value of construction in the National Capital Region (NCR) consistently remained highest at P32.4 billion, accounting for 45.4-percent share of the total value.

Region 4-A was a far second, with a share of 18.7 percent or P13.4 billion, followed by Region 3 and Region 11, with almost equal percentage shares of 6.2 percent at P4.4 billion, as well as Region 7, with construction value of P4.4 billion, or 6.1 percent, of the total.

During the third quarter of 2013, the total value of nonresidential construction was estimated at P29.7 billion, with a total floor area of 2.6 million square meters. This translates to an average cost of P11, 438 per sq m.