What is a Real Estate Bubble and Will it Affect the Philippines?

By definition, a real estate bubble is a type of economic bubble that occurs periodically in local or global real estate markets, typically following a land boom.  Here in the Philippines, talks of a real estate bubble have been with us for quite some time, especially after the US subprime housing bubble erupted in 2008, which almost dragged the entire world economy down.

All this buzz of a real estate bubble is fueling concerns if the Philippine property market is facing this nightmare. So it’s only wise to learn all the facts first before getting all caught up into the hysteria of it all.

1. Real estate industry experts including leading economists  are far more in agreement that with the huge deficit in supply over demand, this bubble is nowhere in sight.  In May the CBRE Philippines assured these fears and said that “demand and supply will continue to become stable as requirements for housing prevail.”

• • The property sector is set to expand more, especially in cities. Last year’s total supply of condominium units exceeded the 30,000 mark. This bullish trend driven by Metro Manila is seen to continue reaching over the 50,000 level by the end of this year.
  • Demand for housing alone is an indicator that supply has not met its level of demand.  As our economy improves with 5.6 % increase in Gross Domestic Product (GDP) in the second half of 2015, we are experiencing solid demand fueled by remittances from Overseas Filipino Workers and the Business Process Outsourcing.  Both the residential and commercial segments of the market are said to show market growth both in demand and supply.

2. Bangko Sentral ng Pilipinas Governor AmandoTetangco says the likelihood of a property bubble is nil. He pointed out that a property bubble exists when real estate prices are bloated artificially due to speculation. This type of bubble is usually fueled by buyers who are encouraged to buy homes because of low interest rates.

• • “The number of people failing to pay their home loans has gone down. The loan rates have gone up slightly, but they have stayed near record lows despite two policy rate hikes by the BSP last year. This means real estate loans should stay down.”Tetangco said “there is no trace of overstretched valuations.”
  • He is confident that the Philippine banks will be able to absorb a 25 to 50% write-down. He pointed out that during the Asian financial crisis in 1997, the banks were able to absorb the write-down which was not as much as 25%.
  • BSP revealed that foreign reinvestment earnings for the first half of the year reached $70 million. The Monetary Board also noted that there are robust demand conditions in the real estate sector “owing to solid private demand and buoyant business sentiment.”
  • Aside from having strong macroeconomic fundamentals, the CBRE Philippines also pointed out that the preemptive measures implemented by the BSP have helped eliminate the risks of a property bubble. BSP is set to release the real-estate price index by end of this year.

3. “There is no truth to the rumor that there is going to be a real estate bubble,” said Board of Real Estate Service Chairman Eduardo Ong in this year’s Asia Real Estate Summit.

• • Ong’s optimism is shared likewise by Jeremy Kelly, Director for Global Research of real estate services firm Jones Lang LaSalle (JLL).  In 2010, Metro Manila ranked 28th in the world in terms of City GDP and by 2014, Metro Manila was among JLL’s Top 30 in its 2014 Global300 index, a report that indicates which countries account for roughly 40% of the world’s GDP.
  • Kelly predicted the Metro Manila would climb to the 25th in 2020, and 18th spot in 2030.

4. Lastly, the major players are bullish.

• • One such player is DMCI which announced allotting P20 billion in commercial space and mass housing development next year for new projects. DMCI will construct residential units ranging from Php500,000 to P1.5M, targeting the lower income segment with 12 new projects covering 15,000 units.

As of now, there is no need to panic because the real-estate sector here is enjoying a boom as new property floods the market which is usually stifled by low prices and developers notorious for completing projects years behind schedule. The best measure is to prepare and not ignore the impact a real estate bubble brings, lest face turbulent consequences.