Understanding property bubble
I remember I came up with an article on the possibility of a property bubble in the country which I said is unlikely because of the favorable economic conditions. My travels lately were particularly interesting because the question seems so ubiquitous everywhere I go. And this time, developers are not only wary of a property bubble but are pitching the thought that we are overly optimistic because of the good grades we get from various (credit) rating agencies.
A developer tossed the question “We all know that the economy is at its best and everybody is jumping to the property frenzy. But will a property bubble happen during good times?” The question caught me by surprise because we’re used to the notion that a good economy always means, good business. And all I could say at that point, was “Some good things never last, so jump in while the boat is there.” Albeit short to expound what I really wanted to say, I hope this column would serve to explain what I believe to be good reasons why the dreaded real estate bubble is not likely to happen as yet.
But just a bit of a caveat emptor, an economy no matter how bullish the indicators point, does not always amount to good business for everyone. Economic indicators are just indicators. They can be likened to a weather instrument, say a barometer, helping us get clues on current weather conditions for us to know what to do if there’s rain or hot days ahead. But barometers do not always result to what we expect. Even with the advent of satellite imaging, we don’t have a way of knowing whether a low pressure can develop into a typhoon or just peter out – but we can always measure them.
Economic indicators paint a good picture of what’s going on in terms of [by] how much money a particular industry has produced, say manufacturing, over a period of time. Economists then collate all other data from other industries to form an opinion of the state of health on a particular industry or as a whole by comparing their growth on a year on year or on a month-on-month basis which they call gross national product and gross domestic product. There are other indicators that economists also factor in to gauge the soundness of the economy (inflation, consumption, employment, interest rates and many others.).
Data culled by our government and credit institutions point that most industries in the Philippines are performing well over the last few years – thus, we have this economic growth or a “bullish” sentiment.
A growing economy such as what we have at the moment is a good sign because industries are increasingly productive and are making money. Hence, it’s a good time to do or expand business. From this view, we can say that real estate is going to benefit from this growth because people have disposable income to buy a house. While not everyone may be able to afford to buy a house, some may just choose to rent which also translates to the growth of real estate rentals.
Now let’s get back to the question of that developer I earlier mentioned, “Will a property bubble happen during good times?” A property bubble can happen to any economy no matter how strong the economy is. Indicators are just indicators and are only meant to help us understand about our chances of growing our money in an intelligent way. The success of a business in a thriving economy also depends on how you put yourself in the competition.
To predict a property bubble is no easy task. We can only know that there is bubble only after it happens like in Thailand, the US and China. So we draw conclusions from the experiences of other countries how and why it happened to them. There are various ways a property bubble can happen – they are usually associated with greed and opportunism. Speculators are one of them.
To be continued…
- Latest
