Housing bubbles. They are the boogie men of entire economies. The reason why they are so catastrophic is that in terms of unit value, houses are pretty expensive, and in terms of numbers, housing is an essential human need, no one actively wants to be homeless, so, necessarily, everyone is looking for a place to live. The problem is when the overriding motivation to buy housing by a lot of people is to make money, as opposed to living.
Has the Philippines reached that mark?
Well not quite.
While vacancy rates in residential properties continue to rise in urban areas, particularly in inner urban areas, that has largely to do with excess supply. Excess supply, however, is not out of the ordinary, and as we head into a period of hyper supply, expect the market to self-correct with capital value growth easing from the extremely robust values over the last three years.
In fact, it was only a year ago since real housing prices in the Philippines surpassed their values of 1997, prior to the Asian dot-com crash, and the economic fundamentals this time around are more inclined to support this growth.
It is telling that despite loan rates rising, the loan failure rate has fallen, which indicates more people being able to afford to maintain a mortgage, than cheap credit artificially propping up demand. Granted, this was also the case prior to the GFC of 2008, but the prevailing interest rates among major banks in the Philippines for retail loans are still in the double digits. Additionally, with their still being a dearth of credit assessment information available, many banks have maintained a conservative position and constructed their loan portfolios to reflect this position.
So, what is the problem then?
Well, there is, in fact, a bubble of sorts. But it isn’t the kind of bubble propped up by unsustainable demand.
See, property developers, responding to the growth in the housing market have continued to ramp up construction even in the face of major natural disasters, as has been the case in Cebu (where a glut has been working it’s way out of the market for the last 3 years and should resolve by 2017/2018). Combined, there will be annual turnover rate of over 90,000 units in both Cebu City and Manila between now and 2018, double to triple historical rates of supply.
This is going to make it difficult for condominium investors to seek outsized returns, and developers to offload their units at prices they had become accustomed to (although, there is a healthy margin in property development, so this is not expected to detract from it’s continued construction). Despite the capital tie up, the bank sector is minimally exposed. Major developers largely source their funding from private equity and at rates much easier and more flexible to service, and stringent lending standards are imposed by banks that do lend to buyers.
The Philippines still does have a world-class problem with traffic, which has accelerated demand for housing close to employment, so it’s not expected that growth will enter negative territory in metropolitan centers as Filipinos are forced to become accustomed to higher density living. Additionally, developers, such as DMCI and Ayala Land, are banking on the long term view that a rising middle class will continue to support the upward trajectory. That is definitely an overriding trend, however, we don’t expect that to be a factor for until perhaps, 2018-2019, when we can expect another period of robust growth.