BSP alert over property bubble

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The Bangko Sentral ng Pilipinas (BSP) is closely monitoring the exposure of banks to real estate sector in order to prevent asset price bubbles formation in the country.

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“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. said in an e-mail.

Tetangco said that real estate is perhaps the sector that has been most covered in the press, because of the natural link to asset price bubbles.

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

The bursting of asset price bubbles was one of the factors of the most dangerous financial crisis since the Great Depression of the 1930s.

The contagion began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire United States financial sector and then to financial markets overseas.

The crisis played a significant role in the failure of key businesses such as banks, insurance companies, mortgage lenders, while declines in consumer wealth were estimated in trillions of US dollars.

“For the BSP, we continue to monitor sectoral developments and yes, real estate is among them. For the latter, aggressive marketing and a growing supply is evident for everyone to see. But we also have a demographic profile [a preponderance of young mobile individuals]and everyday realities [the costs of traffic that everyone wants to avoid]that creates a demand for condominiums and secondary homes,” Tetangco added.

Besides the continued demand for housing, the BSP governor also noted that the robust growth of the business process outsourcing also adds up to the demand for more real estate property.

Prudential focus
Tetangco said that the central bank’s prudential focus is to monitor and determine whether acceptable credit standards are maintained by banks with respect to their exposures to real estate.

“We can do this, for example, through the reforms in Contract to Sell financing, a review of existing concentration limits, forms of exposure haircuts or a further review of the risk weights applicable to different types of exposures,” he said.

BSP data as of June 2013 showed that the real estate exposure of banks remains manageable at P900.1 billion, up by 6.8 percent compared to the bank’s exposure a quarter ago.

Of the P900.1-billion exposure, 84.7 percent was in the form of real estate loans while the remaining 15.3 percent was through real estate investments.

To date, emerging markets like the Philippines were warned of another financial crisis arising from asset price bubbles.

Among those who warned the country is the Washington-based lender World Bank, which said that the country’s strong credit and construction boom presents elements of an asset-price bubble.

In its “Global Economic Prospects” report for 2014, the multilateral agency warned that four countries—Cambodia, Laos, Myanmar and the Philippines—in the East Asia and the Pacific region of 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 multilateral agency said that the sustained increase in remittances and foreign direct investments flows also continues to put upward pressure on the currencies of the region, especially in the Philippines, which is likely to hurt competitiveness.

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