Sports News: property bubble

Saturday, July 21, 2012

Property expert urges public to keep watch on interest rates

Real estate market analyst says that the Philippine real estate is in a healthy state and that a bubble is not imminent. Due to healthy competition, low interest rates, affordable housing packages, the industry continues to resemble a stable balance of law and supply. Still, the experts expect both buyers and developers alike to look into the 1997 Asian financial crisis and learn from the lessons it has offered.

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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.”

Dark cloud

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.

Rate adjustments

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.”

By: Tessa R. Salazar, Philippine Daily Inquirer

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Saturday, July 14, 2012

No real estate bubble but experts wary

Will a crash follow the surge? Are we in a bubble that’s about to burst? A real estate bubble occurs when values begin to increase and reach a point where they outstrip the collective incomes of potential buyers. This causes drastic stalls in lending and sends values spiraling downward.

Enrique Soriano, Ateneo program director for real estate and senior adviser for Wong+Bernstein Business Advisory, recently tackled the phenomenon in a lecture, explaining further that the present property situation does not show that the Philippines isn’t in a bubble yet as the local has exhibited strong fundamentals. He said, however, that the country shouldn’t let its guard down.

He revealed to Inquirer Property of the indicators (such as price points, low borrowing rates, concentration on the National Capital Region, inexperienced players) that lead to a bubble. He also warned that global events may also induce a bubble.

“The key is for stakeholders to be well informed, be made aware of their responsibilities and push for collective programs on property best practices,” Soriano said.

He added that “the role of government is to promote a regularity regime and it must play that role without fear or favor.”

Victor Asuncion, CBRE executive director for global research and consultancy, said there is no possibility of an asset price bubble in the Philippine real estate industry because most projects being built in Metro Manila and other urban centers cater to end-users and not speculating buyers (for office and residential purposes).

Growing consumer demand

“For retail, the developments are addressing the growing consumer demand. Therefore, the buyers of land across the country are either developing or landbanking for future development and not necessarily to ‘trade’ the asset. In fact, there is scarcity of developable land in key urban centers now like Makati, Taguig, Quezon City and Alabang,” Asuncion said.

He cited an expert definition of asset price bubble as the continuous sharp rise in asset prices with expectations of further price increases attracting more buyers, particularly speculators, with the intention to trade the assets and not for end-use or for recurring income.

Soriano said “The current scenario in the country is that almost 80 percent of residential and office developments are in the National Capital Region and developers will jockey for every piece of real estate. With this happening, land prices will continue to increase,” Soriano said.

Naturally, he said, developers would now shift from mid-rise to high-rise developments to offset the higher than usual cost of land. The next scenario would be to build higher, more densely and borrow more to finance bigger, riskier developments.

The ideal scenario would be for developers to disperse their development thrusts outside NCR. The growth areas outside of Manila are Subic and Clark, Iloilo, Bacolod, General Santos City, Cagayan De Oro, Cebu and Davao and even Antipolo, Sta. Rosa City, Pampanga and Bulacan.

Spotting red flags

Soriano stressed that recognizing when a bubble may occur becomes easier with the ability to spot red flags in the areas of lending, spending and employment.

“When the number of available home loan programs increases, home ownership increases with it. While this is sometimes not dangerous, it can be a clear sign of a bubble, especially when buyers increase housing obligations while their income remains the same,” he said.

Soriano said that “as long as mortgages are in good standing, values hold firm or increase. However, as natural life occurrences (illness, lay-offs and pay cuts), unfold in large numbers, condo owners find themselves at the mercy of downsizing—even foreclosure, which gradually drives the price of real estate down.”

Buyer’s market

Soriano also opined: “However, when a market becomes saturated with mortgage debt, lending will often decrease and the number of potential home-buyers follows. Equity naturally slips and profits from home sales gradually decrease (in what becomes a buyer’s market).

“When values continue to fall, it often leads to rashes of homeowners who are suddenly ‘underwater’ (who owe more on their mortgages than their homes are worth) and in extreme cases, foreclosure looms.”

Soriano also cited an increase in unemployment when job fronts level off and unemployment rates increase as a sign that a bubble could be on the horizon; also when workers begin moving to more favorable markets in search of better jobs, or when consumer spending decreases and the market becomes flooded with available properties. He said such scenarios drive values down, marking the true making of a bubble.

INQUIRER, TESSA R. SALAZAR