Property bubble fears

As the property sector boom extends to nearly a decade, it is but natural to expect apprehensions of when the bust will come. The fundamental principle that what goes up must come down indeed applies to real estate prices. Is the property bubble about to burst?

Industry experts are, of course, divided. There are those who believe that property prices have risen crazily. They specifically cite the sale of a lot in Bonifacio Global City (BGC) in September 2014 for a baffling P500,000 per square meter, which nearly doubled the previous record of P277,000 for a similar property sold by the Social Security System just a year earlier.

But the reasons that support the position that the boom in the Philippine property market is far from bursting are many, and appear more compelling. Just consider: Speculative buyers who fueled the runaway property prices in the 1990s are gone, and monetary authorities are making sure that the real estate sector will not cause the economy to collapse again.

The absence of the horde of speculators in the current property boom is evident in the fact that property prices have been rising at about 8-14 percent a year, considered way below the price appreciation that preceded the property busts prior to the 1997 crisis not only in the Philippines but in other countries as well.

On the regulatory side, the Bangko Sentral ng Pilipinas is making sure that banks, currently awash in cash, will not unduly extend financing to the property sector. Local banks will have to cap real estate loans at 60 percent of their collateral values, down from 80 percent at present. The new policy is estimated to curb the flow of up to P200 billion worth of bank credit to the property sector. While a bank can technically lend above the 60-percent collateral value cap, the rule requires that if the loan goes bad, the bank’s books are only insulated to the extent of 60 percent of the collateral value. So if the value of the loan is higher, the bank has to provide additional loan-loss provisions, which are an added cost to it.

There are other reasons many experts believe that a property price bubble is far from bursting. The backlog remains very big, at more than five million housing units. While activity is concentrated in the middle-income segment (all those condominiums rising around the metropolis), there remains the acute shortage of low-cost or mass housing units. Office space vacancy remains very small, indicating a continuing strong demand particularly with the extended boom in the business process outsourcing (BPO) sector.

There is likewise a shortage in accommodation units in the tourism sector, which has been growing at 10-12 percent a year in the past years. Property loan rates, although considered low by Philippine standards at 6-8 percent a year, also remain high compared to mortgage rates in more developed markets. Ultra-low interest rates led to the property-induced economic crisis in the United States in 2008 that led to a global crunch.

Real estate prices here are also one of the cheapest in Asia despite the robust demand in housing, office space and hotel rooms fueled by record-high remittances from overseas Filipino workers, the booming BPO sector and the Philippines’ resurgent economy.

This is not to say that all real estate companies are in very healthy positions. As real estate prices rise (as they have been doing in about eight years), buyers tend to compare sellers and see which of their products are best suited for their needs—with location and price as the main considerations. Not all real estate companies put up projects in the best locations, or sell them at competitive prices. In fact, there are reports that a few property companies, big names among them, are beginning to see demand swiftly slowing, mainly for their expensive or high-end luxurious projects in locations considered “poor” by their more experienced peers.

So buyers beware. Who wouldn’t be afraid of a property bubble bursting? The 1997 Asian financial crisis that saw the Philippine property sector crashing along with its regional counterparts is just too recent to forget. It precipitated one of the most severe recessions that the Philippines ever had. And, as in any bull market, investors must exercise caution. As the old advice goes, if you don’t know anything about real estate, at least know your realtor or property developer.