Analysts may be one in declaring that the Philippines is safe from a real estate bubble just yet. One expert, however, did urge the public to keep a close eye on reliable indicators. Enrique Soriano,
Ateneo program director for real estate and senior adviser for Wong+Bernstein Business Advisory, advised that the country shouldn’t let its guard down.
Victor Asuncion, CBRE executive director for global research and consultancy, assured that there would be no asset price bubble in the Philippine real estate industry, as most projects being built in Metro Manila and other urban centers cater to end-users and not speculating buyers, at least in the office and residential sector.
Nevertheless, Julius Guevara, associate director, valuation and advisory services and head of consultancy and research of Colliers International told Inquirer Property that because of its cyclical nature and the long construction period before units could be delivered to their purchasers, the real estate market would still be susceptible to bubble effects.
Prospect of a bubble
Guevara said: “Hence, the prospect of a bubble is always present. Bubbles typically emerge due to irrational price increases caused by speculative investment. They can also occur when supply cannot address a sudden spurt in demand, and since construction can take years, the supply may be introduced at a time when the demand has already been addressed. Currently, we are not experiencing a price bubble, since demand for real estate has been driven mostly by end users and developer competition has kept pricing relatively stable.”
According to him, Colliers’ International’s observations during the first quarter of 2012 showed that reservation sales grew healthily compared to the same period last year.
“So, we see no signs of decline in demand as of yet. Moreover, our developer clients have learned greatly from the lessons of the 1997 Asian crisis, and they continuously monitor the state of the market, assessing whether it is time to step off the gas and slow down.”
DEMAND for real estate has been driven mostly by end users, and developer competition has kept pricing relatively stable. Photo by Tessa R. Salazar
Guevara, however, warned: “One dark cloud that we see in the horizon is the eventuality of an increase in interest rates. Currently, sales are being driven by local demand supported by easily affordable in-house payment schemes being offered by developers as well as low-interest housing loans from banks. They are able to provide low amortization packages because of a low interest rate environment.
“Benchmarks such as US Treasury rates and the Libor rate are at historically low levels, and Philippine lending rates have also followed suit. Given that they are at historical lows, it should be expected that they will one day go up; the question is when. Once the global economy improves and inflation needs to be checked, these rates definitely will rise, thereby affecting the ability of these developers and banks to offer affordable payment options,” he added.
Soriano agreed, but said: “Rate adjustments are not necessarily dark clouds. As a matter of fact, it can be favorable in harmonizing the sector. Increases in rates are actually a good remedy to balance the demand and supply.”
He added that an adjustment in interest and mortgage rates is inevitable. Interest rate has an enormous effect on property values because of the direct correlation on the price of borrowing money.
Interest rates may not necessarily dampen demand for real estate purchases, said Claro dG. Cordero Jr., Jones Lang LaSalle Leechiu’s head of research, consulting and valuation in the Philippines.
Competition among developers
“The decline in interest rates has certainly helped the demand for housing to increase but while this is true, an increase in interest rates in the near future may not necessarily dampen the demand for real estate purchases. One of the reasons interest rates went down (aside from structural changes initiated by the Bangko Sentral ng Pilipinas) is the competition among the developers. The sheer volume of new residential projects scheduled to be completed in the next five years is likely to influence interest rates to continue to trade at low levels.”
Cordero added that “when interest rates eventually increase, we can expect real estate prices to go down (or get corrected). Hence, while interest rates may eventually increase (and we can expect the payment schemes being offered by banks to tighten), the additional incentive for buyers is the relatively lower housing prices.”
CBRE Philippines said: “While interest rates, indeed, reached considerably low levels, the strong peso as well as continued positive developments in the market contribute highly in stabilizing the prevailing rates. Government spending is aptly covered by local and foreign credit, while confidence levels from the business sector remained high, thus mitigating risk considerations. Money supply is sufficient vis-à-vis the requirements for current developments and impending projects, hence increase at this point is not likely to happen within the immediate future.”