As demand for condominiums and other real properties continues to significantly rise while banks maintain strong appetite for extending real estate loans, speculations abound on how the country may be headed toward another asset price bubble.
Real estate players admit the industry has been enjoying robust increase in sales of residential and commercial units over the last three years, thanks to rising incomes that come with a growing economy.
With the Philippine’s healthy performance, as marked by the above-target growth of 6.1 percent in the first semester, the real estate sector expects to enjoy strong demand for properties over the next few years.
“Stars are aligned right now,” Carl Dy, property sales director for Ayala Land, tells the Inquirer. “Almost all sectors are enjoying good business, and the property sector is not exempted.”
As far as demand for residential units is concerned, Dy says, this is being boosted partly by continuous growth in remittances from overseas Filipino workers.
Households receiving remittances tend to allocate a portion of the money for big-ticket items, including houses, he explains.
Data from the Bangko Sentral ng Pilipinas (BSP) show that outstanding housing loans extended by thrift, universal and commercial banks in the country amounted to P232.57 billion by the end of the first quarter—up 21 percent from the P192 billion reported in the same period last year.
With regard to commercial properties, growth is being fueled primarily by foreign investments in the country’s business process outsourcing industry.
According to the BSP, which tracks foreign capital flows, a substantial portion of FDIs going to the country is accounted for by investments in the BPO sector.
Outstanding commercial real estate loans from banks reached P291.5 billion by the end of the first quarter—up by 21 percent from the P241 billion registered in the same period last year, data from the central bank further show.
Also, nonperforming real estate loans, or loans for which amortizations remain unpaid over a certain period following maturity, accounted for 5.6 percent of total real estate loans.
This is considerably higher than the average nonperforming loans ratio for all types of loans, which is just about 2 percent.
This means defaults on real estate loans are more frequent than those for other types of loans.
But the BSP says that the default ratio for real estate loans is still within manageable levels.
Prudent lending, selling
Economists say rising purchases of real properties does not cause an asset price bubble. The problem arises when—because everyone is enjoying the party given a growing economy—credit-aided purchases of houses and other real properties become excessive. When people are lured into buying properties, usually with the aid of bank loans, amortization costs may exceed what people can actually afford.
Economists say the easy-pay schemes being offered to consumers, such as those allowing zero down payment and light payment terms in the initial years of loan amortization, should be a cause for concern.
This is because the buyers, while they may be capable of paying under the easy terms, may be incapable of shouldering heavier amortization costs in the years ahead.
“Lowering the bar makes less creditworthy people qualify for loans and purchase houses,” says Victor Abola, economist from the University of Asia and the Pacific.
Abola says a bank should be prudent enough to study a housing loan applicant’s capacity to pay not only over the short term but over the entire duration of the amortization. He also says property developers should not be overly aggressive, stressing they should avoid selling properties to those whose paying capacity may be stretched thin.
People should start stepping on the breaks to slow things down in the property sector, he says, before the country faces another crisis.
“We may not suffer from a property bubble anytime soon, but assuming existing trends go on, we might be experiencing a bubble in four to five years,” he says.
Price bubble explained
A bubble forms when the prices of assets, such as real properties, sharply rise over a relatively short period because of excessive demand. People tend to contribute to the price bubble when they purchase houses for investment purposes, speculating that home prices will further increase over the near term, rather than buying property to meet their needs.
A crisis will then follow once the bubble bursts, or when prices of the properties become too high that people can no longer afford them or that buyers are forced to default on their loans because they can no longer afford to pay the amortization costs.
When demand falls and housing loan defaults rise, property prices will sharply and suddenly drop.
The banking sector will take the initial hit because of the increase in loan defaults and the decline in the values of the properties they hold as collateral. Eventually, the entire economy will suffer because an unhealthy banking sector will not be able to support investors’ funding needs. Also, bank failures may spell disaster for depositors, especially those who have deposits in excess of what the state insures.
Asset price bubble was said to have played a major role in triggering the financial crisis in 1997, which affected several Asian countries including the Philippines. Because of too much liquidity at the time, banks began to lend excessively, leading to sharp rise and fall in demand for, and prices of, real properties.
The crisis stunted growth of many economies. In the case of the Philippines, its journey toward becoming a tiger economy was nipped in the bud. Up until now, economists say, the country has yet to catch the next ride toward being a newly industrialized economy.
BSP steps in
Amid concerns of a potential asset price bubble over the short to medium term, the BSP has entered the picture and stepped on the breaks.
Under the BSP rules, banks must keep their “real estate exposure” to 20 percent of loanable funds.
But last month, the BSP issued a regulation advising banks to put tighter limits on their exposure to the real estate sector.
In particular, the BSP requested banks to include the following in their computation of “real estate exposure”: Individual housing loans, loans to developers of low-cost and socialized houses, and investments in securities sold by property firms.
Previously, only loans to real estate developers were covered by the 20-percent cap.
Also, the BSP asked the banks to submit before the end of the year reports on their real estate exposure.
The BSP wants to get “a complete picture of the exposure of banks to the real estate sector,” BSP Governor Amando Tetangco Jr. recently told reporters.
He says applying tighter limits to the real estate exposure of banks is one way to ensure that growing liquidity within the economy does not become destabilizing.
Diwa Guinigundo, deputy governor at the central bank, says there are actually no solid signs yet that an asset price bubble is forming.
“There is no such threat yet. But it is always good to have appropriate measures in place to prevent it from happening,” Guinigundo says.
Data from the BSP show that, as of the first quarter, land values in the Makati Central Business District and the Ortigas Center—the two places in the country where property prices are most expensive—average at about P284,130 and P130,783 per square meter, respectively.
The BSP says an asset price bubble remains farfetched as the land values are just about 67 percent of the peak seen during the 1997 Asian financial crisis.
Tighter rule
So far, there has been no objection from banking industry players regarding the stricter limits on real estate exposure.
Aurelio Montinola III, president of Bank of the Philippine Islands, says BPI has no complaint about the move of regulators toward controlling real estate lending.
Although tighter credit standards may drag profitability, he says, the BSP is just being prudent when it decided to limit real estate lending.
“The BSP wants banks to better manage their exposure to the real estate sector. We understand the intention behind it [tighter real estate lending],” Montinola told reporters when asked to comment on the new regulation by the BSP.
Threat is real
On the question of whether the country is facing another threat of an asset price bubble, most regulators, bankers and economists believe that the current levels of lending and real estate prices still do not indicate that a bubble is forming.
But they all agree that proper regulation and discipline among banks and real estate developers must be in place this early to avoid another crisis five years down the road.