Is Philippines property market facing 'supply bubble'?

by Warren de Guzman, ANC

Posted at Mar 26 2015 11:49 AM | Updated as of Mar 26 2015 09:47 PM

MANILA, Philippines - Bangko Sentral ng Pilipinas Governor Amando Tetangco says the likelihood of a property bubble forming and popping under his watch is nil.

People say there's a property bubble if they think speculation has driven real estate prices up artificially.

This bubble is usually fueled by an increasing number of buyers egged on by cheap loans.

A run-up in housing prices fueled by demand, speculation and low interest rates, which can encourage speculators and regular folk to buy homes they can't afford, believing rising prices will allow them to flip the property, sell it quickly for a profit.

For Tetangco, there is no trace of overstretched valuations.

He says even if a bubble were to form and burst, Philippine banks will be able to absorb a 25-50 percent writedown.

"Not at all... In fact when you look at what happened in 1997 and 1998 during the Asian financial crisis, the writedown was not as much as 25 percent," he said.

Also encouraging, the number of people failing to pay for their home loans has gone down.

Loan rates have gone up slightly, but they have stayed near record lows despite two policy rate hikes by the BSP last year.

This means real estate loans should stay down.

"There doesn't seem to be any cause or reason for interest rates to significantly go up," Tetangco said.

'Supply bubble?'

If there is a problem facing real estate, it is this.

Data from international property services company Colliers shows total unsold condominium units in Manila has averaged 75,000 over the last three years, double the normal supply level of 35,000 to 40,000.

Condo sales have also showed.

Colliers analyst Romeo Arahan calls it a supply bubble. He says it would take at least two years to remove the bubble, provided no new condo projects are launched.

But the building continues.

Colliers expects developers will continue to launch condo projects over the next four years.

Arahan says it is encouraging the rate of launches is slowing.

But he warns if the supply bubble were to grow, it would make it harder for condo owners to re-sell their units and eventually limit pricing options for developers as well.

Macquarie made the same warning weeks ago, adding a build up in inventory and receivables would definitely hurt earnings and tie up capital.

"Some developers may have to slow down in starting new projects because there is a risk of overbuilding...If developers don't slow down and sales won't move, we will see a build-up in inventory and receivables that will hurt earnings," Bloomberg quoted RJ Aguirre, an analyst at Macquarie in Manila.

Ayala Land president Bobby Dy admits supply is growing, but he is betting the growing middle class will help demand catch up.

"In terms of supply, there is a lot of activity in the middle income, but frankly that is where also the need is coming from. When you look at the economic growth over the last few years, it is inevitable," Dy said.