Lower ceiling on bank loans to real estate eyed

The Bangko Sentral ng Pilipinas is looking at the possibility of lowering the ceiling on real-estate lending by banks due to concerns of an asset price bubble.

The BSP believes that while there is still no solid evidence that bubbles are forming in the real estate sector, having a pre-emptive measure is essential as the robust growth of the economy brings with it a continued rise in demand for property  that could push up prices.

“Adjusting the loan limit on real estate is something we can consider. The real estate market is quite unique because banks have a big exposure to it. We want to avoid asset bubbles from forming,” BSP Deputy Governor Nestor Espenilla Jr. said Friday.

An asset price bubble is characterized by sharp increases in the price of assets such as real estate, fueling a surge in purchases on expectations of further price increases.

These bubbles inevitably burst, causing prices to return sharply to more realistic levels, leaving a number of investors with overpriced assets and weaker financial muscle.

Under current rules, banks’ exposure to real estate is limited to a maximum of 20 percent of their total loan portfolio.

Last year, the BSP expanded the definition of the term “real estate exposure of banks” for monitoring purposes.

Originally, the term captured only lending by banks to commercial real estate developers. Now, the term covers even loans extended by banks to individual borrowers wanting to purchase real properties; loans extended to developers of socialized and low-cost houses; and investments by banks in securities issued by real estate firms.

With the expanded definition, the BSP recently directed banks to submit comprehensive reports on their “real estate exposure.”

The BSP is now reviewing the reports and is expected to come up with new regulations on real estate lending.

Concerns that the Philippines may be facing threats of asset price bubbles were raised due to the significant growth of the real estate sector over the last few years.

The BSP said, however, that current demand conditions were different from what were observed in the late 1990s, when many Asian countries succumbed to a financial crisis due partly to asset price bubbles.

In the years leading to the Asian crisis, the BSP said, purchases of real properties were largely boosted by demand of speculators who bought and sold property.

Today, the BSP said the demand was coming from actual users of residential properties and business process outsourcing firms needing office space.