FOR the past couple of years, anyone who has any reason to comment on the matter has stubbornly insisted that there is no real estate bubble forming in the Philippines. Property developers, analysts, and the central bank are all in agreement: Demand, price growth and lending all remain at healthy levels, and indicate a robust sector. And from outward appearances – visually represented by the gantry cranes that have sprouted all over Metro Manila like a weird metallic forest – the experts would seem to be correct.
But there is something just a little forced about the enthusiasm for the country’s property business, because the statistics that are commonly used to give weight to the optimistic assertions only raise more questions.
Last week, the BSP released bank real estate lending data for the third quarter of the year, which revealed that through September, banks’ real estate loans totaled P1.19 trillion, 19.2 percent higher than the P999.46 billion lent to the sector in the first nine months of last year. Over the past several years, lending has consistently expanded at a rate of about 20 percent from period-to-period; likewise, real estate lending as a proportion of banks’ total loan portfolios has also remained consistent at about 20 percent.
The relative distribution of real estate loans has remained steady as well. About 75 percent of the loans are made for commercial purposes, mostly for new construction and land acquisition, while about 25 percent are loans to consumers, primarily for purchasing real estate, although a small percentage are equity credit. The relative scarcity of the latter, in fact, is sometimes cited as evidence that a real estate bubble does not exist. Prior to the collapse of the housing sector in 2007 in the US, equity lines of credit as a proportion of GDP soared to over 12 percent, with much of that money going to speculative property buying. Interestingly, Canada is experiencing similar circumstances now, thanks in large part to a land rush by Chinese investors. That sort of situation isn’t happening in the Philippines – yet – because most consumer borrowers are buying properties for their own use, or if they are borrowing to purchase an investment property, they are doing it with new loans rather than extending existing mortgages.
The BSP also pointed out that property prices continue to rise, which is indicative of continuing demand. Citing second-quarter figures (price data for the third quarter of the year is only now being gathered), the central bank said property prices increased 11.3 percent overall from the second quarter of 2015. However, that figure somewhat masks a disturbing development: Broken down into the National Capital Region and areas outside the NCR, there is a big difference in price movement. In the NCR, real estate price growth slowed to 2.7 percent —only slightly higher than the prevailing inflation rate—in the second quarter of this year from a torrid 17.6 growth rate a year earlier. Prices in areas outside the NCR accelerated from 9.9 percent last year to 18.4 percent in the second quarter this year, but there are a couple of unavoidable caveats to that apparent piece of good news.
First, provincial prices are inevitably lower than property prices in the NCR; it varies from region to region, but the price range is from 20 percent to 90 percent lower for similar properties. Second, the uniformly more expensive NCR still accounts for about 42 percent of the overall real estate business in terms of lending, supply, and presumably demand. So while on a percentage basis the areas outside the NCR pulled up prices overall, in monetary terms, the positive difference from last year to this year is relatively small.
Another indicator that the real estate sector may not be as robust as it appears is in the persistent vacancy rates of residential properties. In a report yesterday, Jones Lang Lasalle Philippines highlighted the fact that vacancy rates in Metro Manila’s most expensive property markets (Makati and Bonifacio Global City) had declined slightly in the second quarter from a quarter earlier, to 6.3 percent from 7.5 percent.
That sounds like good news, but because of the way most residential real estate is sold—on a reservation basis, often years in advance of actual construction (my favorite person in the world, who handles properties for a couple of major developers, describes it as “selling air”)—there technically shouldn’t be any vacancies; since there is no development of rental property to speak of, “vacancy” in this case means “unsold” rather than simply “unoccupied.” Anecdotally, the 6.3 percent vacancy (unsold completed units) rate in the high-end segment is a little more positive than in the larger mid-range segment, where several property agents estimated vacancies are running at closer to 10 percent.
Real estate lending for new development is expanding at a rate that is nearly ten times price growth in the largest and most lucrative segment of the industry, and the stock of speculatively built, unsold units appears to be growing as well. The alarming suggestion of all this is that despite protestations to the contrary, the Philippines’ real estate sector is, indeed, approaching a tipping point; the bubble is real, and it is growing steadily, maybe not very quickly, and hopefully not so quickly that the eventual collapse cannot be avoided, but at some point in the very near future it is going to be impossible for even the biggest optimists to ignore.