Bangko Sentral to tighten property regulations

Agency sees risks of potential asset price bubble

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Responding to concerns that tightening real-estate regulations in neighboring economies could be pushing speculative demand to the Philippines, the Bangko Sentral ng Pilipinas said a new directive further limiting the exposure of banks to the property sector was being readied.

The new regulation would also follow observations that supply of residential properties for the high-income segment was starting to become excessive.

What the BSP should do in particular was to limit banks’ real-estate loans and investments—which include housing loans granted to individuals, credit extended to property developers and holdings of securities issued by real estate firms—to a certain percentage of their capital.

BSP Governor Amando Tetangco Jr. told reporters that the central bank was still in the process of determining the exact figure for the cap, but added that the new regulation would be out soon to ensure threats of an asset price bubble would not materialize.

“Part of the funds used by real estate developers is coming from abroad, but we [BSP] cannot say right now how much exactly it is,” Tetangco said. “This is the direction the BSP is taking: To reference real-estate exposure of banks to their capital.”

Tetangco acknowledged as valid the observations that supply of real properties in the high-income market could now be exceeding demand. He said, however, that overall market supply remained below total demand as evidenced by the huge backlog in housing units, estimated at more than three million units, for the low-income segment.

Under existing regulations, banks in the country are required to limit their real-estate exposure to 20 percent of their total loan portfolio. The term “real estate exposure,” however, is limited to loans extended by banks to commercial real-estate developers.

In neighboring economies like China, Singapore and Hong Kong, tougher real-estate regulations have been issued recently in the wake of risks of asset price bubbles. The regulations ranged from higher taxes to limits on the number of properties individuals could buy.

Risks of a bubble are a result partly of stimulus measures implemented in advanced economies. In particular, portions of the funds being injected by the US Federal Reserve, the European Central Bank and the Bank of Japan to stimulate their lackluster economies were believed to be going to robustly growing Asian economies in the form of investments in real estate and portfolio assets.

Economists said that at a time when real-estate regulations were becoming tighter abroad, speculative demand in real estate (that is, demand from people buying properties for investments rather than for their own use) was poised to go to locations where the regulatory environment was more relaxed. This was the reason the Philippines should seriously consider adjusting its regulations, they said.

While foreign investments are welcome, economists said excessive demand for securities and real estate could cause prices to rise steeply. Very high prices are unsustainable and pose risks of a sudden and sharp drop, which, in turn, could lead to a crisis as investors suffer huge losses.

They said the Philippines, given its recent attainment of an investment grade and the bullish growth projections for its economy, was highly attractive to portfolio and real-estate investors.

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  • carlcid

    There is a property bubble developing, as hot money keeps coming in. The administration may deny this, but all the signs point to a bubble economy. Jobs are not being created fast enough, while infrastructure is inadequate. It is ridiculous how the congestion at NAIA is hobbling the airline industry, while alternatives are still years away. Greece, Cyprus, Ireland, California, Florida all had booming economies at one time. All had A+ investment grade ratings, far superior than the measly BBB ratings of the Philippines. And, yet, the floor fell from under them. It could well happen here, especially if the government and the Central Bank doesn’t act soon enough.

    • cabcog

      There is no evidence that foreigners are foraying in our property market. I believe that the hike in property prices is more driven by the growing remittances from OFW and BPO business. As many says, our country has a young and potentially productive population which makes our economy appear to be resilient from outside forces compared to the countries you mentioned. You also have to consider that inflation is still at a manageable level and interest is low. Jobs will be created on a gradual basis if the bull market continuous to run for a year or so. More companies got additional capital, taking advantage of the bullish market, which will be spent in more projects/business which will then results to more jobs.
      The countries you mentioned already had expensive property market developed over the years and were financed out of high interest environment and because of their slump economy and inability to rebound from the credit crisis, these countries are left into uncertainties. Their already expensive way of living has caught up with them (imagine how much it will cost a bag produced in China vs. the same bag produced in Europe or US) which was worsen by the entry of China in the world economy equation. In short, there are many factors that contributed to the fall of the economy in the west which the BSP hopes to avoid.

      • carlcid

        Sorry, but that’s wrong on every count. Interest rates were rather low in developed countries, even before the crash. As a matter of fact, Alan Greenspan has been criticized for fueling the bubble by keeping interest rates too low. It is correct that there now exists a low-interest regime. That is why, when the tide turns, the consequences will be very painful. The present bubble is actually fueled by low interests, and low interests cannot be held indefinitely. What goes down has to go up. Then the bubbles burst.

      • cabcog

        It seems that you didn’t understand my point too well and your analysis seems to have no sound bases. You cannot compare the US to the Philippine. What I was trying to say is that lending rates before the crisis is higher as compared to current rates. You probably never thought that the US crisis was mainly caused by the sub-prime lending and this is not the case with what you say a possible bubble burst.

        I cannot understand what is your basis in saying that a low interest environment will be the cause of a bubble burst. If the banks did what they are suppose to, which is to lend to those who are credit worthy, such burst will not happen.

        Again, the target market of these properties are the OFWs and the growing BPO industry. At this time, there is no oversupply and some even say that demand continues to grow.

        You should probably do more research and improve your poor understanding of the US credit crisis.

      • carlcid

        Either you must be dense or you are a propagandist for the government. Banks tend to lend indiscriminately when interests are abnormally low because of high liquidity. That is as irrefutable as the law of gravity. That is why subprime happened, because Greenspan caused unusually high liquidity by keeping interests too low for a period of time. There are universal parameters in finance, and comparisons between the U.S. and the Philippines are valid. You must be absolutely naive to think that banks will always do “what they are supposed to do”. If that were the case, there will never be bank crises.

      • cabcog

        It really amazes me where you get your dopey ideas. You are correct on low interest and high liquidity but the crisis happened because banks have been aggressive (they were encourage to lend to spur business growth) and ignore certain risk management procedures. Did you ask yourself why the US and the world didn’t increase the rates after the crisis (instead lowered it further) if this is what you suppose is the cure or what caused the crisis? Also, ask yourself why all banks are required to beef up their capital after 2008 and are encouraged/required to be conservative.

        I am not a propagandist for the gov’t rather I am challenging your flawed-analysis. Calling people names is a sign of surrender and in being a low-life.

        We are talking of the rates between US and Phils. and not on fundamental parameters. You said “Interest rates were rather low in developed countries, even before the crash.”; of course it is low and it will continue to be.

      • carlcid

        Just read today’s Inquirer article about S&P warning about an overheating economy. That the danger of bubbles is ever present cannot be denied. Of course, a propagandist will follow the party line, no matter what.

      • cabcog

        We eat and live on risk and uncertainties. Who says that doing business is risk free? The big question is how probable the risk is and how close we are in a burst. As long as we maintain consumer and gov’t spending levels and inflations checked (exports and OFW remittance is a plus), the economy will continue to grow. The event that we have to look at is the flight of capital caused by the renewed vigor of the economies in the west which I don’t think will happen soon.

        If you think that I am a propagandist, I am sure you are either an anti-government or a GMA fanatic or a low-life with crab mentality.

  • rickysgreyes

    Low cost housing should be exempted. It should not only be BSP working on this, how about HLURB? They should not be issuing condo licenses to everyTom, Dick, Harry and Juan.

  • Jose Pepe

    Thanks GOD, its about time BSP tighten property regulations. The numbers don’t lie, property development here and there for the last three years. Who’s going to buy? We are at the verge of an asset bubble. I salute BSP for this.

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