The Philippines remains relatively safe from a housing market bubble but the country should be watchful as higher interest rates could pose a threat to the rapidly growing real estate sector.
“Unless interest rates went up a lot, not much problem would arise in the property market. The biggest risk in the property sector is if inflation pressures go up significantly and the central bank eventually has to raise rates,” said Rajiv Biswas, chief economist for the Asia-Pacific at IHS, a US-based think tank.
The International Monetary Fund recently said that interest rates in emerging markets like the Philippines could spike in response to the latest US Federal Reserve decision to continue to taper its bond-buying program.
“Of course the recent increases in interest rates may somehow dampen the momentum, but I think the underlying reasons why the property market has been so dynamic is because it is connected to the strong growth in the Philippines and that should continue,” Biswas said.
On the sidelines of the World Economic Forum on East Asia held in Makati
Thursday, Biswas said in an interview with The Manila Times that the Philippines is not at risk of a property bubble compared to other Asian economies like Hong Kong.
“We’ve seen a rapid increase in property prices but the risk of a sharp correction is still very limited. Only if interest rates would go up sharply, then we might see a bubble. Economic fundamentals in the Philippines remain strong, hence the strong demand,” Biswas said.
“I’m more worried for other Asian property markets like Hong Kong, which spiked up in a few years. Also, Mainland China is showing signs of a property bubble. In cities like Singapore and in Malaysia, the problem is not that much but you could already see some moderation in growth in prices,” he added.
However, Biswas emphasized that inflation pressures can create a domino effect on the market.
“The big risk is if you see some factors like extra shocks that would affect inflation.
One shock could be if El Nino affects the agricultural production of Southeast Asia and that puts up food prices, then that could result in higher inflation, and if that continues in a length of time, the central bank would be forced to tighten rates,” he said.
Biswas explained that the property sector in the country has benefited very strongly from the rapid growth of the overall economy over the last few years, with annual growth of over 7 percent in the past two years.
“That resulted in quite a strong momentum for the property sector. In the
commercial property market, what we are seeing is strong growth of the IT-BPO sector, which is creating a strong demand for office space,” he added.
In the residential housing market, he emphasized that the demand is coming from many sources including from overseas Filipino workers.
Nonetheless, Biswas said the property market should be mindful of a possible bubble that may occur in the future.
“We have to keep watching this because we could not be complacent,” he added.