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.
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.