Understanding property bubble
(Second of two parts)
The possibility of a bubble will always be there but the likelihood of a bubble to happen in the near term is remote in that, the Bangko Sentral ng Pilipinas (BSP) has already put a cap on real estate exposure of banks in addition to stricter loan covenants for both commercial and residential borrowings. The BSP, by far, has done a good job in putting the right measures to quell the onslaught of a bubble. As to whether or not they are enough to prevent it from happening is something we do not know. Theoretically, these measures should dampen banks to give in to the temptation of over-lending to this sector.
“Whether or not we are in a possible bubble, I don’t think we’re there yet but it’s always a good reminder to link every credit decision to capital,” assures BSP Deputy Governor Nestor A. Espenilla Jr.
While there is an obvious demand for residential acquisitions, it is interesting to note the role of Pag-ibig in institutional and retail home lending. For housing developers, Pag-ibig has already extended some P3.5 trillion worth of loans already since 2010, and averages some P30 billion annually for housing loans. Pag-ibig, being a government-owned and controlled corporation, happens to be one of the most profitable and liquid government institutions with more than enough funds to whether a property burst. Pag-ibig plays a unique and significant role in the housing market as it is not only a good alternative to banks, but also in mitigating the impact of a bubble by absorbing part of the shock.
The subprime tragedy in the US occurred in anticipation of a forthcoming better days which did not happen. Which means, people were borrowing money to buy houses in the hope of paying them off when they get a raise. In other words, borrowing was tied to their own future economic condition.
The Philippines is unique is that borrowers of real estate are mostly Overseas Filipino Workers. OFWs are not only better paid they are also in countries with very stable economies with very stable jobs. Which means bad times do not happen in all countries at the same time thus, many would still be able to pay off their mortgage. OFWs are also very resilient – and are willing to take any job during bad times just to send money back home. The number of OFWs is also increasing everyday not to mention the number of Filipinos who have permanently settled abroad and are sending money to their families.
OFWs are now more educated when it comes to investing their money. They are buying real estate to make money in rentals. This way, they can already support their families with their passive income.
Another good reason why a property bubble is not likely is the fact that we have an apparent shortage in housing. Closing in to 4 million units, developers have yet to find ways to meet this huge demand.
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