Of property bubbles and Cebu’s builders

A local economist and educator called for diversification in the real estate industry after a London-based economic research company cautioned the Philippines to watch out for a possible property bubble.

Fernando Fajardo, economist and professor at the University of San Carlos, said developers only respond to the perceived current demand and accordingly to invest in new projects, especially with the low interest rates prevailing now.

“But things could go wrong when there are too many of them doing the same thing, and when the perceived future demands at the time the projects are ready do not materialize,” Fajardo said.

According to a report by Colliers International, the demand for residential units in Cebu during the third quarter of 2016 grew by a quarter on the back of a strong take-up in the economic units.

More than half of the total take-up then were from the mid-income category, followed by economic, and the affordable segments.

On the supply side, some 1,900 condominium units were launched during the period covered, driven by the low-cost category.

Overall vacancy jumped 25 percent from 20 percent a year before due to the completion of a significant number of new condominium units.

Colliers said the favorable overall demand from locals is mainly attributed to increasing household incomes driven by OFW remittances.

Other factors that have affected stronger take-up during the period are low interest rates; flexible and affordable payment schemes offered by banks and developers; improved accessibility to residential projects, especially those inside township projects; and a generally robust macroeconomic environment.

In a recent Inquirer report, London-based economic research firm Capital Economics was quoted as saying that the rapid credit growth in the Philippine financial system was not something to worry about yet, but it expected the Bangko Sentral ng Pilipinas (BSP) to temper real estate lending amid signs of overheating.

Capital Economics economist Alex Holmes said in a June 16 report that while there was no need to panic, the high credit growth rate in the real estate sector, as evidenced by accelerating property prices, should be watched carefully.

According to the BSP’s latest residential real estate price index, housing prices nationwide rose by an average of 0.3 percent year-on-year during the fourth quarter of 2016, although slower than the 2.2-percent increase a quarter prior and 5.2 percent from a year ago.

However, Holmes said real estate lending only accounted for a fifth of the country’s total loan portfolio.

Investopedia defines a property bubble or housing bubble as a “run-up in housing prices fueled by demand, speculation, and exuberance.”

Housing bubbles, it adds, usually start with an increase in demand, in the face of limited supply which takes a relatively long period of time to replenish and increase.

“Speculators enter the market, further driving the demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the bubble bursts,” the definition reads.

Asked whether this could happen in Cebu amid the rapid growth of its real estate sector, Fajardo said “anything is possible.”

“On matter of policy, I leave it to the BSP to determine if current expansion in credit that finances real estate growth is growing beyond normal and to put a brake on it when necessary,” he said.

Fajardo said it was hard to say when it could happen, but most often the bubble will burst when no one or very few expect it, similar to what happened during the collapse of the US housing market not long ago.

Fajardo was referring to the US housing bubble affecting over half of that country, where housing prices peak in early 2006, started to decline in late 2006 and 2007, and reached new lows in 2012.

“Nobody also predicted the Great Depression in the 1930s, which started with the sudden plummeting of US stock prices in late 1929,” said Fajardo.

The economist said what developers should do is to always factor the possibility of a real estate bubble and have contingency plans ready once it bursts.

Fiona King, founder of RFK Holdings, said bubbles happen when there is a huge gap between supply and demand.

“It is the market’s way of correcting itself,” she said.

One of RFK’s projects is BLOQ Residences, an affordable housing project that targets millennials.

But while real estate development in Cebu has seen robust growth in recent years, King said it would be prudent to view the industry not as “one big pie,” but “several pies of different flavors.”

“When specific movements happen to the markets, it will have an effect on the appetite for specific pies, and not on all,” King said.

She said the government has recognized the affordable housing backlog in the Philippines and has also made important moves to address this.

The developer said she believes these coming years will be interesting for the segment as the support of the government will serve as a driver of its growth.