• Is the real estate bubble about to burst?

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    GO to any mall, from the posh to the pedestrian, and well-dressed young ladies (far more in number than the gentlemen) will approach you to hand you a brochure selling condominium units.

    By the roadside along Sta. Rosa in Laguna – said to be the emerging mega-suburbia –you’d see less well-dressed sales people waving to motorists to stop so they could offer their brochures selling lots and houses in gated residential sites.   Newspaper ad space is now dominated by property advertising. Do these indicate a booming market, or one that is getting desperate?

    A favorite question in coffee shops and cocktail lounges has, indeed, been: Is the property bubble—one of the few major drivers of our gross domestic product (GDP) over the past several years—about to burst? The head of one conglomerate reportedly very recently told his close friends: “Get out of property now. “

    The World Bank in its regular reports, which on the whole have been optimistic on the country’s economic prospects—has been including as a “major concern” to growth, as early as May 2013, what it terms as “potential supply bubbles in the real restate industry.”

    One major explanation for the real estate’s rapid expansion is the fact that developers put on hold their projects when the global financial crisis broke out in 2009. After that, the corks were unplugged. The country’s low-interest rate regime, due not only to the country’s success in weathering that global financial typhoon but to the flood of liquidity in emerging markets as a result of the US “Quantitative Easing (QE),” also boosted the property market.
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    Last year, the property market was given another big boost, when the Bangko Sentral ng Pilipinas restricted banks’ Special Deposit Accounts, which had higher interest rates than savings accounts.

    By the World Bank’s figures, about P1.5 trillion in funds were released to the system, and the bulk likely went both to fund developers’ property projects and investors’ purchases of real estate. “Money exiting the SDA facility could further exacerbate speculative growth of real estate, which, together with a rise in interest rates caused by the tapering of quantitative easing in the US, would increase the probability of defaults,” the World Bank report said.

    As a result, the World Bank estimated that in some segments, the “number of condominium units in the pipeline is far greater” than the average number of units that was built in the last decade.

    While banks’ real estate exposure is limited by regulations to not more than 20 percent, the World Bank had raised the concern that the financial system’s actual exposure may be understated because of “shadow banking,” or in-house financing by the developers.

    Global property consultant Colliers International’s reported, though, that there isn’t any sign at all that the high-end market is about to burst, pointing out that the Makati central business district’s average price of a luxury 3-bedroom condominium even rose 13.4 percent this year to end-March to P136,533 per square meter. There is some softening of the market, though, in that it was the slowest price rise since 2012.

    The markets for this sector are expatriates who rent them and the country’s elite, who purchase the units as investment and for rental income. But property consultants are starting to ask worrying questions.

    Has the market reached the saturation point in terms of expats coming into the Philippines and the rich wanting to buy another luxury condominium? Will the elite, if they notice a slowdown in rental values, no longer buy new posh condominiums?

    That there is an oversupply underestimated by prices was indicated by a World Bank report which pointed out that 10,600 units were built in 2013 alone, up from an annual average of 3,500 units in the last five years.

    The most vulnerable section of the industry, though, according to the international web-based publication “Global Property Guide,” is the small, mid-end condominiums costing at least P2 million, which many property developers in recent years have focused on.

    Their marketing tack borders on selling false dreams, that a small unit could be had for just P15,000 a month. The fine print, though, requires payments on a “balloon” basis after the first or second year, amounting to half a million or a million pesos. Middle-class buyers, nevertheless, still agree to those terms, hoping that after a year they’d double their salaries—which more often doesn’t happen.

    The biggest clientele for mid-end property has been OFWs, and the World Bank had estimated that 60 percent of their remittances – totaling $22.9 billion in 2013 – into the country had gone into buying mid-end property.

    However, according to the Global Property Guide, their remittances have slowed to an average annual rate of only 7 percent from 2009 to 2013, compared with 17 percent annually from 2004 to 2009. This has been due to political and economic uncertainties in certain host countries (the most extreme cases of which have been Spain and Greece) and the slowdown in the advanced economies, prompting OFWs to reduce remittances to their families here in the Philippines.

    There is one market that has frustrated mid-end property markets: the young call-center employees of Business Process Outsourcing (BPOs) outfits. With their relatively high salaries of P30,000 monthly, they had been expected to be buyers of small, mid-range condominium units as they would prefer to be near their places of work. It seems they haven’t.

    “The bottom line is that their spending power is not yet strong enough to absorb supply,” the Global Property Guide article said. “Many have family obligations and prefer to live at home or with relatives,” it pointed out.

    Based on my own observations, still far from the minds of young BPO employees —as really expected for their age range – is investing in their own homes. They’ve instead been spending their incomes on partying and purchasing electronic devices and top-of-the line clothes. That has given malls and restaurants around BPO centers a boost.

    So is the property bubble soon to burst? Reading between the lines of the World Bank reports pointing out its concerns over “asset bubbles” in the real estate market, it very likely will if:

    • There is a major downturn in OFWs remittances due to a rise in interest rates in the US and to political and economic downturns in the Middle East, where the bulk of contract workers are; and

    • As usual, a sudden phase of uncertainty in our own political and economic stability, triggered by a drastic fall in confidence over the Administration or the economy;

    But the chain breaks at its weakest link, a property consultant told me.

    What he meant is a scenario in which a developer—not necessarily a major one—would go belly up, as it is unable to sell enough of its units to keep its head afloat. Already there is a bit of concern about a major developer to which banks have stopped lending.

    That kind of difficulty even by one property company would send the markets into panic, potential buyers would hear about it and hold off their purchasing plans, causing other property developers to keel over. Impossible? Just think of Fil-Estate, Luke Roxas’ ASB Holdings, and more recently Globe Asiatique—once the favorite of property brokers.

    The problem with ordinary mortals like us, and most OFWs, is that we are the last to know about these things. As usual, it would be the elites who would know first that the property bubble has, in fact, already burst.

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    21 Comments

    1. There is clearly a bubble when condos in ILOILO are being priced like Manila condos, in the 1.5 to 2 million range. For that price, one can buy a house and lot but Double Dragon is selling condos here for that. Ridiculous.

    2. Solve the crime situation (daily kidnappings, riding in tandem robberies/ killings, crimes by policemen, etc..) and a tremendous amount of retiring overseas Filipinos specially from the US would comeback and buy homes in the Philippines or at least come back more often as tourists. I know of many retirees who wanted to retire in Manila but have instead bought houses in Arizona and Florida.

    3. Property companies and related personalities/organizations preach that there are no industry bubbles whatsoever. But how come they are enticing target customers with no downpayment and low amortization schemes?

      • And that’s the reason why those developers are only requiring smaller down payment or no downpayment at all and low monthly amortization so they will be able to meet their expenses while building those condominiums otherwise they will go bankrupt, with political and economic instability abroad affecting mostly OFW , their priorities may change.

    4. Dick S. O'Rosary on

      I for one am looking forward to a burst. Only then will I, and many others will be able to afford a place to call my own.

    5. Can a buyer turn around and sell his unit for a handsome profit ? I know that its been a long time that this secondary market has been weak, signalling a bubble. Drive around at night and observe how many units in a sold-out condo are lighted and compare to Hongkong. A great majority of the units are dark, which means they were bought not to be lived in, but for investment (read speculative) reasons. The last indicator is the best. Manny Pacquiao’s Forbes Park home cost him around $7M. Google $2M homes in, say, San Francisco and you will find a lot of properties that are superior to anything that Forbes has to offer in terms of design, location and view. You can imagine what a $7M house in that city looks like. Fasten your seatbelts, folks.

    6. A “Real Estate Bubble” is always debatable. In my 22 years experience in the real-estate business, Ive learned that it is always a continous cycle but no one knows when it will gonna exactly happen. We cant just believe “Madam Auring” or a President of the biggest Real Estate Company what their predictions are because they have different objectives. Some are “rumors mongers” for hire with their own ulterior motives.

      Everybody needs a home and its still practical to live in a Condo Unit near your business or work place. To save on gasoline expenses and escape the tremendous traffic. If theres a “Bubble” in my opinion, the affected ones will be the “A” market which comprises only 3-5% (Investors). They own multiple units anyway and have place to use. Why will you rent a biggger space when it is more expensive and youll not gonna end up owning anyway. The “B” and the “C” market meaning the rest of us needs at least one unit to dwell on. Government/Developers Surveys claims there is still a backlog in this area. Foreign Investors are also more active players now coz their economies are either not moving or even going down. Were the best candidate coz according to Surveys were 2nd to Indonesia with still the lowest per square meter price in Asia.

    7. Im not praying na mag-burst na sana. Kaya lang, hindi naman talaga natin mapipigilan yan. Ang dapat nating gawin ay maging handa for this bursting propery bubble.

    8. the good side of the property burst is the cost of the condominiums will gone down and so the middle class people could afford. as what my relatve in u.s told me to just wait 3 to 5 years to purchase those condos. make sense..

    9. I agree the condo sector is due to burst or has already burst. The other reality sectors will also be impacted.

    10. the lesson here is that for potential buyer of condo unit, BUY AN EXISTING UNIT and not one under construction. oo nga, mas mahal ang existing unit as compared to one being built pero yung iyong peace of mind about your investment is not quantifiable. in other words, DO NOT BUY A PROMISE but buy an existing unit. caution tho, make a little research on the developer or owner of the unit you want, baka may problema sa creditor at nakasanla yung title ng condo.

    11. This is inevitable. The economic model has not changed. Maximize profit, at all cost. One may end up with better insight watching the following movies listed below. Although all three movies were critically acclaimed, these were kept out of the mainstream for obvious reasons.

      Inside Job
      Too Big To Fail
      Margin Call

    12. If it is overly inflated, it will definitely burst to shreds of nothing. People will be left with mortgages to pay with no property to own. The banks will own the condos in mortgage defaults.

    13. I happened to attend a sales presentation of condominiums and houses in Metro Manila by the developers agents in California. As a co-onwer of a unit myself, I was surprised to know of the tremendous growth of units in and in nearby cities and towns of Medtro Manila. This doesn’t include other major cities and towns around the Philippines.While it is really very tempting to buy a unit and retire in the Philippines for good, buyers especially those from the U.S., may find it frustrating because of the following: which, the presenter did not address along with the pros of buying a unit or investing in the Philippines:

      1) Peace and order hasn’t improved along the improvement of housing availability;
      2) The traffic condition in Metro Manila has become a ‘hindrance’ because of the constant gridlock, especially when it rains; and
      3) The political climate has become worse, if not worst.

      Along with the above, there have been instances when the developers file for bankruptcy before the completion of their buildings. (I was approached by one who has practically spent her lifetime savings for a condo unit in Metro Manila, only to find out that the building is not even half-done. She needs help to recover what she has paid the developer company).

      In short, a buyer or an investor has to consider other factors aside from affordability.

    14. Gloria M. Kuizon on

      Huwag naman po sana mag burst ang real estate market. Kawawa naman kaming mga namili dahil akala namin sound investment. Ang mga OFW families ang karamihan ng mga bumili ng mga condo.
      Kaya maski napakapangit ng pamamahala ni President Aquino at ni Budget Sec. Abad, hindi yata puputok ang People Power para siya ibagsak. Siguradong babagsak ang real state prices kung magpi-People Power.
      Pinaka maganda ay makonsyensya si Ginoong Aquino at magbitiw na lang at umupo si Vice-President Binay na sasama sa National Transformation Council na tinatag sa Lipa.

      • if your purpose in buying real estate is to have a place to live, then bursting of a bubble doesnt affect you at all. but if the intent is to re-sell property at a higher price then its a different story.

        In the philippines , bubble or not, its always hard to RE-SELL condo at a higher price.

      • dapat bumili kayo ng tapos na para wala na ung pangamba na hindi matatapos. Sumusugal kayo kapag pre selling.

    15. There is a very dangerous sign that indeed the real estate bubble is going to burst very, very soon. There are many signs which cannot be ignored. In China, there was an interview by Discovery channel with one of the biggest property builders in mainland China where you can see that everything is not good in that country. There are many properties including apartment, dormitory buildings complete with amenities which are empty. Sad to say the builder says those properties have been built years ago. And what was the main reason of the burst? These properties are just too expensive which the regular-income Chinese cannot ever afford. Much like in the Philippines, China might be an economic giant but ordinary workers receive meager incomes compared to the rich Chinese, members of the politburo. In the U.S., it is written that sales of properties remain stagnant. So if these countries are experiencing bad business in property, how much the Philippines.