BSP: No asset price bubble amid pandemic

MANILA, Philippines — Equity and property prices remain manageable as domestic liquidity and credit dynamics support economic activity amid the COVID-19 pandemic, according to the Bangko Sentral ng Pilipinas.

BSP Governor Benjamin Diokno told reporters that monetary authorities are not expecting an undue surge in asset price inflation amid the global health crisis.

“Equity and property prices remain broadly in line with market fundamentals and within historical range. The recent slowdown in economic activity due to the pandemic would also tend to dampen asset price movements and is seen to soften market demand,” Diokno said.

He noted that property prices are still driven by office space demand from Philippine offshore gaming operators, traditional firms and business process outsourcing in the office segment, while demand in the residential segment emanated from domestic and foreign workers mainly connected to the BPOs, including the POGOs.

“While there is persistent demand for residential properties, it would not indicate an asset bubble,” the BSP chief said.

Latest data released by the central bank showed that the residential real estate price index (RREPI) recorded a double-digit increase of 12.4 percent to hit a record 134.9 in the first quarter from 120 in the same quarter last year.

Diokno said the increase in demand for condominium units fundamentally reflects the existing sizeable housing backlog in the country, and the desire of many Filipinos working or studying in city centers to reside near their workplace or school due to the worsening traffic situation.

“Hence, we see both developments in both equities and real estate sector as mainly driven by market fundamentals. We see the price movements in both areas are within the long-run trend. Per the latest staff analysis, house prices do not indicate overvaluation at the moment,” he said.

Diokno said valuations in the equity market have come down recently, thereby lessening the risk of an asset bubble.

Likewise, he said the recent easing of overall credit demand, as well as tighter credit standards based on the second quarter 2020 Senior Bank Loan Officers’ Survey reduce the likelihood of asset price inflation due to a credit boom.

Based on BSP data, real estate loans accounted for 19.8 percent of the total loan portfolio as of end-December 2019.

“The bank exposure to the real estate sector is in line with BSP’s regulation limiting their exposure to the sector to 20 percent of their loan portfolio,” Diokno said.

Diokno also said the ratio of overall nonperforming real estate loans to total real estate loans remains below two percent.

Diokno said domestic liquidity rose at its fastest pace this year, suggesting that the BSP’s policy easing and package of liquidity-enhancing adjustments have started to gain traction.

During the same month, preliminary data also showed that bank lending growth eased, reflecting partly the constrained economic activity during the quarantine.

“In the coming months, we expect credit activity to pick up amid the gradual reopening of the economy. Nonetheless, the recent easing of credit demand and tighter credit standards reduce the likelihood of asset price inflation due to a credit boom,” the BSP chief said.

Even before the pandemic, the BSP has already implemented various macroprudential measures that would safeguard against property price bubbles.

These include placing a cap on real estate loans and loan-to-value ratio, as well as introducing new monitoring tools such as the real estate stress test and the RREPI. Expanded real estate exposure reporting and implementation of the REST have helped curb the real estate exposure of banks.

Moreover, the adoption of the countercyclical capital buffer on big banks as well as their subsidiary banks and quasi-banks intends to prevent excessive credit growth.

“The BSP remains steadfast in ensuring that the expansion of money and credit, along with fiscal stimulus and low interest rates, will provide underlying support to economic activity without leading to excessive future inflation and contributing to financial stability risks,” he said.