A warning that cannot be ignored

4

The current property boom in the Philippines, particularly in major urban areas like Metro Manila, is one of the major contributors to gross domestic product growth.

Advertisements

But even as major conglomerates in the country remain upbeat on the prospects of the domestic property and real estate sector, the warning by Washington-based lender World Bank over a possible asset-price bubble should never be ignored.

In its “Global Economic Prospects” report for 2014, the multilateral agency warned that four countries—Cambodia, Lao PDR, Myanmar and the Philippines—in the East Asia and the Pacific region of a possible price-asset bubble.

“The strong credit and construction boom presents elements of an asset-price bubble in the four countries that could unwind in a disorderly fashion if not managed prudently,” it stated.

The views of the World Bank may have caught the attention of the Bangko Sentral ng Pilipinas (BSP), which said last week that it is closely monitoring the exposure of banks to the real estate sector to prevent asset price bubbles formation in the country.

“Our concern for any sector—including real estate—is part of our prudential oversight of bank exposures. Issues such as concentration risk, credit quality, underwriting practices and interconnectedness will always be recurring concerns for prudential reasons,” BSP Governor Amando Tetangco Jr. told the press.

He explained that the phenomenon of bubbles certainly is a critical concern, because economic history has many cases where bubbles caused massive dislocations and/or instigated further damage through the rest of the economy.

The most recent asset bubble was in 2007, when sky-high home prices in the United States went on a downward spiral, which affected the entire US financial sector and sent shockwaves to markets overseas. And a host of sectors exposed to the real estate sector naturally suffered.

While the World Bank sees a possible asset or property bubble in the Philippines, and the BSP is already on the lookout for it, the question is: who or what is going to slow down the current property boom and the massive lending to consumers for real estate property purchases.

Since the country continues to enjoy a steady stream of dollars from overseas Filipino workers, and real estate firms (which are mostly units of major conglomerates with banking arms) want to cash on dollar remittances, it would be hard to imagine how government could apply the brakes on what could be the building of excess supply of real estate?

However, it cannot be denied that the business process outsourcing (BPO) sector is also fueling growth of the property sector, particularly for office buildings. And the BPO sector is expected to remain robust in the next few years, which also ensure the generation of additional employment opportunities in the Philippines.

So what the BSP and the country’s banking sector could do is to make sure that an initial slowdown in property purchases would not hurt the banking system itself.

But what if the appetite of property buyers pushes banks to lend in the billions and the trillions, and the BSP thinks that is simply normal?

Perhaps another property bubble, this time emanating from within the Philippines, is needed to teach big business to temper their appetites for profits and to be realistic in their projections of the housing needs of mid- to high-income buyers.

Besides, the World Bank never makes projections based on numbers culled from looking at the moon. Their warning should be heeded this early.

Share.
loading...
Loading...

Please follow our commenting guidelines.

4 Comments

  1. Why does our economic planners can’t create a diversified atmosphere for investment? This myopic policy of focusing more on property and services sectors for years now has unnecessarily shanghaied limited capital to the said business sectors. These local investors invest in the property sector and none on manufacturing and heavy industries because they can derive huge profit in a shorter period of time than the later. This is greed and unfortunately, the government condones the act. Compared to manufacturing, BPO’s and much more the properties sector is highly susceptible to short-term economic downturns and upheavals.

  2. To avoid bubble we need manufacturing firm in order for the average Filipinos to own a house. Because these will increase buying capacity, and create more buying real estate property.

  3. The price asset bubble is already upon the PH real estate sector. Since 2009 when I started doing real estate in PH, the high end prices for condos have gone up about 32 % per annum. It was so good a price level to be missed that a major PH player cashed in and rid himself of more 330 million common shares in his holdings company to go into the sunrise casino game building stakes in the reclaimed area by Manila Bay but failed to attract enough attention from recognized big players in the gaming industry. High rises have gone up and changed Manila’s skyline and all these towering edifices have become the toast of the town, so to speak. But check on these sky scrapers on any given night and check how many of the rooms in the floors are lighted and you will get the surprise of your life. Completed constructions have been leveraged to build upon one another and the loan portfolios of the largest PH real estate players are to be found in the largest PH and foreign banks. Sweetened deals with big time foreign investors are not uncommon. So in the dark of the night the new high rises remain silhouetted against a background and backdrop of the old city where people still go about their daily toil, night and day, to make ends meet.

  4. It was mentioned in an article I’ve read a few years ago that Balikbayans
    are the main target as investors in the country’s real state. I myself was
    one of those considering to purchase a condo as a retirement home. While
    it is true that we retirees of USA and Canada are looking to downsize,
    it doesn’t necessarily mean we would like to live in matchbox- sized
    condos. I’ve rented Makati condos during our recent two visits in the
    Philippines and was turned off by the sizes and shoddy construction. We,
    residents of North America are well adjusted to large houses. Yes, we
    would like to downsize but we also would like to breathe and move easily
    in our retirement homes.