Real estate’s imminent decline

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Ej Lopez

Ej Lopez

Everybody, this writer included, acknowledges the immense participation of the real estate industry to the growth of the economy last year, and predictably also for this year. A considerable percentage of the country’s 6.6-percent gross domestic product growth rate in 2012 has been attributed to the growth of real property business, which presumably includes the brisk sales of condominium units.

“According to Jones Lang LaSalle [JLL], in 2000 only around 7,000 condominium units were completed. This figure jumped to about 90,000 by the end of 2011, and between 2012 and 2016, approximately 154,000 condominium units are expected to complete.” The brisk sales of condominiums can be attributed primarily to actual demands (end-users) and not from potential demand (speculative buyers). This was further complemented by low interest rates that prevailed in the financial market, an offshoot of a slowdown in the international financial market. Such scenario brought about the depreciation of the dollar against the peso, and theoretically other currencies. A study reveals “another source of demand for Philippine real estate is the influx of expats brought about by the booming IT-BPO (information technology-business process outsourcing) industry. According to leasing and estate firm CBRE Philippines, expats are making a tiny boom in the country’s residential real estate, particularly in the luxury segment (http://www.zipmatch.com/article/ current-state-of-the-philippine-real-estate-market).” The temporary settlement of expatriates locally has promoted and boosts the sales of high-end residences, primarily condominium units. The same source reveals that the highest returns are on units 80 square meters or larger, suggesting an oversupply of smaller condos. Middle-class condo units primarily are of sizes lower than 80 square meters. But how many of these middle class can afford to own a second home, and invest on properties of these price scale?

These real estate edifices, however, do not cater to local market. If ever the local market would be the thrust of the said projects, it caters to upper middle class or higher. But even this societal class would think twice prior to buying these types of dwellings and if ever they do, would rather own a house and lot in posh villages where privacy is a premium. Average prices of condominiums where the sizes range from 80 square meters and above is P10 million to P15 million. This amount plus a little more would provide you a house and lot with a durable investment premium more than what a condominium can provide. Condominium living primarily caters to people who are looking for their second home, who want comfort and luxury in life, who boast of prestige and style.

Condominiums are part of modern urban living, and this recent trend has addressed the problem of space in the urban areas because these are geared toward vertical development. But despite the modernization, people are still looking for an abode where they can call their own; that sense of belonging where you have a certain degree of territorial control which condominium living cannot offer.

Economic trends show the gradual tapering off of the real estate business in the next year or two. The markets for housing, more particularly condominiums, have reached the saturation point, where the target market, actual demand or otherwise, have either bought or already possess their second homes. These type of real properties do exist only in the urban area and very few in the rural yet urbanized centers. Aside from what appears to be a perceived oversupply of these “commodities’ in the market, there seems to be the unabated development of other posh villages and subdivisions in the Southern part of Metro Manila, which further flood the market with high-end dwellings that not too many people can afford. Potential demand for these products does exist, but how many have availed?

These have been complemented by the low interest rates and other financing add-ons but still, the price is rather steep for an ordinary middle-class family or individual. Despite the more liberal policies adapted by financing institutions on housing loans, majority are still cautious on the pretext that what happened to the liberal financing in United States in recent years that led to the collapse of the real estate industry, should not be repeated in our local shores, where the standard of living and therefore purchasing power is more constrained by our basic necessities.

Not because of the constellation of the stars in our galaxy, but more of the possible limitations that confront it, the real estate industry is facing a decline. If not done according to our own accord, the imminent occurrence of property bubble burst is in the offing. The effect of which may create a chain reaction on all other macroeconomic indicators, which may significantly affect our growth target in the next year or two.

Real estate investors would like to have a hand on the profit take of the industry, but in so doing, it has created an oversupply which practically has exceeded the actual demand for the product. The situation at a glance seem irreversible, because these are hard investments that are not easily liquidated, unless and until the investor is willing to sell or dispose it at a cost equivalent to its average total cost (break-even cost), to escape the more expensive cost of maintaining a nonmoving inventory.

For comments e-mail: doc.ejlopez@gmail.com
with cc to: opinion@manilatimes.net.

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