No property bubble for us

MANILA, Philippines –  My colleague, Wilson Lee Flores, expressed his concern in his Facebook posting that a property bubble may be upon us. “Real estate is still amazingly strong and has not yet imploded despite what I consider ‘too high’ high prices,” he observed. Wilson dabbles in property sales and I figured he must have a reason for his fears. As it turns out, he and I just got worried because we are seeing more and more condos being built, wondering who will buy all those units and making us think things don’t seem sustainable.

It didn’t help calm Wilson’s fears when his Malaysian and Thai friends told him their economies are richer and they have a bigger middle-class and they couldn’t understand why our real estate prices are way too high compared to theirs. So I asked around what is going on. A property professional and BSP Governor Say Tetangco assured me we aren’t about to go the route of the Americans any time soon.

But I couldn’t help being skeptical. There is so much newspaper advertising offering aggressive terms including no down payment and I keep on getting text messages offering me easy loans to buy property. That eerily reminded me of the months before the bottom fell on the American property sector.

The property professional reassured me that our market follows a rather predictable cycle and he thinks we still have a couple more years of a boom market. Maybe, if you folks have any plans of buying a condo unit, wait two years and as soon as all those current constructions go to market, the developers will be killing each other to sell. There is, however, a risk that the economy will be even better by then and there are more Pinoys with money and the units will be even more expensive.

It is instructive to note, it was explained, that the condos are now being built not just in the hub of the business districts. They are in the relative periphery that approximates the location of schools, hospitals, call centers, city hall etc. In other words, these are being built and bought not for speculation but to be actually used.

The condos in the Fort are serving a different class of buyers compared to the condos being built in Ortigas or in the periphery in Makati or Taft Avenue. They serve different purposes with different demand and pricing dynamics. The property professional also thinks our banking system is still a lot more conservative than the American financial system so that property financing here is pretty much down to earth.

Gov. Tetangco agrees. On the dynamics of the banking system’s exposure to the property sector, the Governor said it is normal to expect the peso amount of exposure to rise over time, in part because of construction materials price index inflation and in part due to demand. With the growth of BPOs and call centers, there is a specific and great push in the demand.

It is important to remember, Governor Tetangco explained, that the Philippine demographic profile suggests we are one of the youngest if not the youngest in the region. That plus rising incomes means housing demand will invariably increase.

Then there is the demand push from the OFWs. The OFWs pretty much insulated our economy from the worldwide economic crisis. For the property sector, the OFWs (other than those from the US) continued to fuel the demand for condo units and housing in general which the developers are merely responding to.

A recent news dispatch from the Agence France-Presse datelined Manila confirms the OFW influence on the local property market. “Overseas workers are moving the market. Properties now are selling and when there is demand, prices go up,” Emily Duterte, head of the Real Estate Brokers Association of the Philippines, told AFP. Industry sales nationwide this year are estimated to hit P300 billion ($6.9 billion) compared with about P100 billion each in 2009 and 2008, AFP quotes Claro Cordero from Jones Lang La Salle, a global real estate consultancy firm.

On the relative magnitude of the financial sector’s exposure to Real Estate Loans (RELs) the Governor reassured that there is nothing to worry about. As of June 2010 it was P398.3 billion. “While this was the highest level thus far, the relative proportion to total loan portfolio has not fundamentally changed much through time. The ratio RELs to TLP as of June 2010 was 14.7 percent which was not far from the 15.2 percent in Q1 of 1999.”

The Governor also noted that “the NPL ratio for RELs during that same period moved from 20 percent (Q1 1999) to about 23 percent in 2003 and then consistently began to fall to 6.4 percent, where it stood as of June 2010. In effect, while the relative exposure was V-shaped, the quality of that portfolio has been the reverse.”

The Governor also reassured that “the BSP of course continues to monitor the real estate sector for indications of either an asset bubble or a breakdown in asset quality. As a rule, we enforce a 20- percent limit on banks for their exposure to real estate. Beyond the hard-coded cap, we continue to monitor NPL ratios of banks, both in general and on RELs in particular.”

The Governor concluded, “Coupled with top level information on condo prices and financing arrangements, we do not yet see irrefutable indications of a bubble or credit weaknesses. That said, we are currently reviewing our regulations with regard to real estate financing and exploring ideas where some further tightening may be considered, if and when the data warrant.”

I don’t know if the Governor’s reassurance is enough to calm Wilson’s fears but it should. After all, Governor Tetangco is probably the best performing BSP Chief we have had in recent times in the sense that he understands the technical side of banking regulation from the macro perspective of an economist. Not having come from the banking sector, he also has a more objective view of the BSP’s regulatory functions.

If Say Tetangco says we are in no danger from a property bubble leading to a financial meltdown, then there is no need to worry. But let us make sure our property developers don’t get as greedy as some of them did some years ago which caused massive losses to the government’s housing program. But that’s another story.

Cassava

I received this e-mail from reader Steve Ellis.

Your article this morning regarding energy and the new head of the Department of Energy, Mr. Jose Rene Almendras was both very comprehensive and reassuring. However, I would like to comment on the choice of sugarcane as a feedstock for ethanol; and mention a possible pitfall over the long term in the choice of Sugarcane over, say, cassava. The good news is that I believe Sugarcane has a rosy future in the processing industry and for the following reason

Taking Thailand as an example; in the ‘70’s before it became a Tiger economy the consumption of sugar was 14 kilos per capita per year; which by 2005 had risen to 35 kilos per capita per year; and the multiplier effect was 60 million people. In 2005 the Chinese per capita consumption of sugar was nine kilos and that of India 14 kilos; and here the multiplier is 2,200 million.

By 2008, China had used up its reserves of corn and wheat as feedstock for ethanol. On reaching this fork in the road it appears to me China made a strategic decision to reserve its sugarcane production for its food processing industry. It started building ethanol distillation plants based on cassava in SW China, and planting thousands of hectares in the surrounding hills; and drawing on sources of cassava from neighboring Laos, Cambodia and Thailand

Other than the questionable future economics of sugarcane as a feedstock for ethanol, and the possible political fallout from the reemergence of the Food for Fuel debate once the barrel of oil goes above $150 [and it will sooner than later]; cassava has a very compelling reason in its own right to be taken seriously.

Cassava has the advantage of being relatively undemanding, and will thrive on poor and even tired soils, where few other crops will grow [with the exception of jatropha/ bio-diesel]; it can also be grown on land at high altitudes, up to 2,000 meters in the tropics; which in the Philippines could translate into using highlands in northern Luzon.

Affair

From Rosan Cruz.

When an old man admitted to his equally old wife that he was having an affair, she replied: “Oh goody. Will it be catered?

Boo Chanco’s e-mail address is [email protected]