Bubble unlikely, thanks to BSP policies, continuing demand

For the past several years, the Philippine economy has been rising gradually, a fact that experts believe would stay near 6 percent for the remainder of the decade.

This growth, according to Oxford Business Group, is largely driven by the sectors that included business process outsourcing, industry and construction. Construction activities combined with real estate make up around 20 percent of the Philippine economy.

But while being one of the crucial drivers of economic growth, the real estate has also been a trigger of problems. Who could forget the Asian financial crisis of 1997 and the crash of the property market that went with it?

That event, barely two decades ago, triggered a domino effect of catastrophes: Several real estate companies went belly up, banks turned insolvent, suppliers and construction firms lost contracts and clients, while property values were cut in half.

Unlikely to happen

Armenia Ballesteros, national president of the Subdivision and Housing Developers Association, said during a recent business forum with the Board of Investments (BOI) and the Bangko Sentral ng Pilipinas (BSP): “We believe that what happened 18 years ago is unlikely to happen again. As property developers, we have become more cautious. Moreover, the BSP has introduced measures to monitor the real estate sector. These measures range from ordering banks to report loans they give out to developers and their investments in securities to finance real-estate activities, and their overall exposure to the property sector.”

Resource speakers were director Corazon Halili-Dichosa, executive director of the BOI’s Industry Development and Trade Policy (on Housing Policies and Guidelines, Investment Priorities Plan 2014-2016); BSP manager Concepcion Garcia (on BSP Circular No. 755 and 855); and BSP deputy director Cynthia Sison (on BSP Circular No. 839).

Close watch

During the forum it was reiterated that since the 1997 Asian financial and the 2008 global economic crises, the BSP has kept a close watch on the property market, wary that real estate prices could shoot up and create a bubble, then take banks down should it burst.

In 2012, the BSP broadened scrutiny beyond direct housing loans to cover banks’ holdings of bond and equity investments that fund property developments.

Moreover, through Circular No. 839, the BSP required banks to undergo a new industry “stress test” aimed at bolstering their ability to withstand pressures that could arise from greater exposure to the property market.

BSP Governor Amando Tetangco Jr., during a Management Association of the Philippines general membership meeting held in February, said the Philippine banks’ real estate exposure remained manageable, allaying renewed fears of a property bubble. He added that banks remain above the minimum capital prescribed under the regulator’s real estate stress test.

Tetangco added that while a number had figures too close to the required levels, these banks are still above the minimum requirements. He also assured the audience that there is also a continuing regulatory discussion and consultation between the BSP and these banks.

The stress test proved valuable considering that at the end of last year, the combined real estate exposure of universal, commercial and thrift banks amounted to some P1.221 trillion, which is 21.4 percent higher than the P1.006 trillion recorded in 2013.

Data from the BSP showed that loans extended by banks to homebuyers and real estate firms surged 24 percent to P1.043 trillion at the end of 2014 (2013: P843 billion). Real estate loans comprised 85.4 percent of banks’ exposure.

Similarly, banks’ investments in real estate securities, which accounted for the remaining 14.6 percent, went up by 9 percent to P178.028 billion at the end of 2014 (2013: P163.554 billion).

Establish discipline

To establish discipline and responsibility among credit-granting institutions, the BSP issued Circular No. 755, which no longer allow banks and other lending institutions to offer flat interest rates on loans. A flat rate is when lenders charge a fix interest rate to a particular loan within a certain maturity.

For a lender to be more transparent as to the true cost of the loan, a declining rate is mandated since the interest is based on the balance of the loan plus all the fees and charges computed every paying period. With BSP Circular No. 755, fees and charges are part of the “mandatory disclosures.”

Circular No. 855, on the other hand, amended the guidelines on sound credit risk management practices to ensure that financial institutions have adequate and effective credit risk management systems. This reinforces the microfinance principle, wherein granting of credit should be based on cash flow as the primary source of repayment and reputation of the client.

Ballesteros allayed fears, explaining that the supposed oversupply of housing units is unlikely to happen. She said: “In fact, the Philippines has an acute housing backlog, which is around four million housing units. While activity is concentrated in the middle-income segment, there remains the acute shortage of low-cost or mass housing units.”