PH told: Watch out for property bubbles

There was nothing worrisome in the rapid credit growth in the Philippine financial system yet, although London-based economic research firm Capital Economics said it expected the Bangko Sentral ng Pilipinas (BSP) to temper real estate lending amid signs of overheating.

Capital Economics economist Alex Holmes said in a June 16 report there was no need to panic yet. What the country needed to monitor vis-a-vis a possible financial crisis “is the increase in debt as a share of GDP (gross domestic product), as this takes into account a country’s ability to service its debt … Given the strong recent pace of nominal GDP growth in the Philippines, as well as the country’s relatively low level of debt, the change in private sector credit relative to GDP has been small.”

He stressed, however, that the high credit rate growth in the real estate sector, as evidenced by accelerating property prices, should be watched carefully.

The BSP’s latest residential real estate price index (RREPI) showed that housing prices nationwide inched up by an average 0.3 percent year-on-year during the fourth quarter of 2016, albeit slower than the 2.2-percent increase a quarter prior and 5.2 percent from a year ago.

Still, real estate lending accounted for just a fifth of the total loan portfolio, Holmes said.

“What’s more, there are few signs that consumers have been on an unsustainable lending binge. Consumer lending has recently been growing at a slower pace than overall lending. It is notable that private consumption growth has slowed for three consecutive quarters,” Holmes added.

He also noted an increase in lending in the manufacturing sector and for infrastructure projects.

“Since we have previously identified weak infrastructure and an uncompetitive manufacturing sector as key constraints on the country’s growth prospects, rapid credit growth to these sectors should be seen as broadly positive as it should help to alleviate these problems,” he said.

He believes the BSP would not increase interest rates just to stop overheating in the real estate sector “as this could cause lending in other sectors of the economy to slow.”

“In the past, the BSP has tended to respond to increased risks in the property sector through the use of targeted macro-prudential measures. Over the past few years, the bank has tightened lending standards and introduced stricter oversight of banks’ exposures to the commercial real estate sector. Further such steps are likely,” Holmes said.