Read an insightful article on Inquirer asking whether we are again headed to another asset price bubble due to the booming property development (and seemingly oversupply of condominium and office space units). Read full article here.
Also, last year, I wrote about the increased visibility of SMDC (PSE: SMDC @ 5.95/sh , price back then was 8.38) along EDSA as they acquire prime properties for their SM Residences (and display their gigantic red and yellow logos). Well they haven’t stopped and construction in a number of sites is ongoing, not just along EDSA but in Makati, Global City, Ortigas, Mandaluyong, North Avenue, down south in Pasay, Bicutan, Paranaque, etc.
And the condominium construction craze (3Cs) is not just limited to SMDC. Empire East (PSE: ELI @ 1.08/sh), sister company Megaworld (PSE: MEG @ 2.80/sh), Ayala Land and affiliates Avida, Amaia (PSE: ALI @ 25.05/sh), DMCI (PSE: DMC @ 52.90/sh) and other developers also have lots of numerous projects ongoing (Robinsons Land (PSE: RLC), Filinvest (PSE: FLI), Vista Land (PSE: VLL), Century (PSE: CPG), Cityland (PSE: LAND) etc) all over Metro Manila and nearby areas.
Questions are, is demand still there for these units which will finish 2014, 2015 some even up to 2017? And is the property market heating up so fast with all these investment activities that anytime soon, price increases may just burst and do a free-fall?
Growth To Continue
Per the article, companies have been enjoying increased sales of units in the past few years, supported further by the growing economy and increased bank appetite to lend on real estate via home loans. Default rates may be increasing for the banks but remains on a manageable level, and since loan is secured, a secondary market for repossessed properties is another mitigant.
This party is expected to continue in the next few years. BPO offices and OFWs remitting money to the country are the leading consumers of the properties being constructed.
The article clearly pointed out the price increase does not always equate to price bubble. What we need to watch out for is excessive lending and selling. Excessive lending to those who can’t even pay, and excessive selling to those who do not have capacity to pay the amortizations for the long run, or to those who are into speculative purchasing.
Developers usually offer easy down payment terms at 0% for 24-48 months installment. Credit checking here is not that strict since in the event that you are no longer able to pay the down payments monthly, you lose the property (developer sells your unit to other customers and developer profits from your past payments). But for those who are able, this is an attractive offer since payments usually range from Php10k and below monthly. This way of selling is very enticing to the average consumer.
After this down payment portion comes the heavier part, when one will already need a home loan financing to pay for the balance portion of the property. Here banks will have to be more prudent, discerning and judicious in approving the home loans. Down payment amortizations of Php10k may translate to Php15k to Php20k a month in 3-4 years time once the customer is now paying the home loan. This is crucial as well for the customer since s/he should not only assess capacity to pay the down payment, but more importantly capacity to pay the home loan 3-4 years down the road.
Market Becoming Speculative?
Yes it is true that Filipinos generally still buy properties to live on them and as investment, rather than as speculative purchase and for resale once prices go higher. But Filipinos are also not financially illiterate, as there are now more and more Filipinos who buy and sell condominiums just to take advantage of the price increases. I’m sure there are more now than before.
Domino Effect and Regulation
Should a bubble occur and should it burst, then banks will be the first one to be affected since the customers will default on them. The economy will soon follow given tighter lending criteria from banks (less liquidity and credit, less economic activity), and fear from the market to spend given the uncertainty of the times. Developers will also have their share of unoccupied, unsold excess inventory of units. This has happened before in the Asian Financial crisis, hopefully this time, the Philippines is able to avoid it. This early BSP has already set in, putting a cap on how much banks can lend to real estate as % of their loans portfolio.
Regulators and market players all agree that a bubble is not yet imminent and not too probable, but acknowledge it as an ever present threat. Hopefully our market now is more mature and more responsible. As we have seen, even the first world countries fall to these traps, what more ours that is still developing?
PS. No endorsements and advertisements intended for stocks and brands mentioned in this post.