Is there a real estate bubble?
Published: December 21, 2018
DISCLAIMER: This material, which is strictly for information purposes only. The views and opinions expressed in this article are those of Juan Patag’s and do not necessarily reflect the position of RE/MAX Capital, or of any other RE/MAX franchise. Any information is subject to change without prior notice. No liability whatsoever is accepted for any loss that may arise (whether direct or consequential) from any use of the information contained herein. Information Each RE/MAX franchise is independently owned and operated.
In recent years, we have seen real estate prices in Metro Manila soar to unprecedented heights. In fact, ultra high end condos are being sold at Php650,000 per square meter.
And one of the most common asked question we would get is, is there a bubble? I’ll go straight to the point and say yes–in certain segments I think. The reason people fear these “property/asset bubbles” is because the rapid increase in property prices is historically followed by a sudden crash. So the better questions to ask are:
• Which segment in the property market is the bubble, and
• What are the risks of the bubble bursting?
To answer these, let me first talk about why I think the prices are stable in certain segments (and this is all based on what we see in the market).
Ultra-high end condos
Examples: Discovery Primea, Park Central Towers, One Roxas, West Block of Rockwell
Buyers of these properties are mostly old rich families, as well as owners or top management of the country’s top 1000 corporations. The old rich families use the interest income or rental income of their various properties to purchase more. Some use the unallocated cash of their businesses, knowing that real estate investments have better risk-return ratios than any equity or fixed income assets. They buy properties in cash.
Some buy these properties as a status symbol of their wealth, knowing that people in the same social circle also have units in the same building. Some buy it for their kids, given the scarcity of available lots in high end villages such as Forbes, Dasmarinas, Urdaneta, etc. For these reasons, these properties are price inelastic (not sensitive to change). Simply put, these are the people who keep their Ferraris despite economic downturns.
Examples: Rockwell East Block, Park Terraces, Two Serendra
The buyers of high-end properties are a mix of end-users and investors. End-users are those people who are doing well in life and enjoy some of the luxuries life can offer. Some buy these properties from the windfall from their parents. Investors are also prominent in this space. They want to reinvest the hefty profits booked from the recent run up in real estate prices, looking to repeat the same success. They have healthy generating businesses and they park their money in real estate. Only a few get bank loans to finance the purchase.
Mid-end to Low-end Condos
Examples: DMCI, SMDC, Robinsons Land properties, properties that are in the outskirts of the CBDs
Buyers of these properties are mostly middle-class end-users. They have 8-5 jobs and have recently moved out of their parents’ house. They take a bank loan to buy these properties. I’m quite sure that they have steady jobs and work for top corporations; otherwise banks wouldn’t lend them the money. Thanks to the Asian Financial Crisis back in the 90s, our financial institutions have the stringiest qualifications in the world for personal loans. This is not where the risk is.
The risk lies in the sudden influx of Chinese buyers. Have you heard of stories where a Chinese buyer walks in a showroom and purchases several floors in one go? As I found out, these “buyers” aren’t really buyers. They are brokers. They pay the reservation money (which ranges from Php25,000 to Php100,000 per unit) to the developer and re-sell the properties in Chinese Mainlanders. Mainlanders have all the reason to buy in the Philippines: 1) invest in better air quality in the Philippines, 2) protect their hard earned money by bringing it offshore, 3) better opportunities in the Philippines (US$10,000 wouldn’t go far in China).
Here’s the problem: we don’t know how well the Chinese brokers explained the payment terms to these buyers. As we’ve heard, these buyers don’t pay spot cash; they take terms when purchasing (e.g. Php10,000 a month schemes). The question lies when the balance comes due—the time when local buyers get bank financing. I don’t think local banks or Chinese banks will lend to them. They don’t have anybody else to borrow from but the developer. Aside from the interest rate risk (especially since it’s on an upward trajectory) and the more volatile foreign exchange risk, there’s serious political risk. What if, the Chinese government decides to restrict capital flows to certain foreign countries–which they’ve done so many times in the past. What happens if they miss payments for a month? For two months? A quarter? What if a chunk of these foreign buyers default? Will projects still be completed? This is highly probable as proven by the fact that a certain publicly traded real estate company’s past due ratio became more than 25% of total receivables some years back (The company was privatized in the same year).
I know, a lot of these claims are unfounded. However, you can’t displace the fact that these are legit questions. I don’t think even regulators have means to check (i.e. BSP can only monitor banks; SEC does not have the manpower to effectively monitor all private companies.)
The good thing is, if the bubble does burst, I don’t think the pandemonium would reach the other segments; simply because leverage isn’t a big component in the other segments. Yes, there might be a slow down but it shouldn’t be as serious.
The points I’m trying to drive at are: First, I hope developers control the amount they sell to each nationality. Second, buyers/Investors should carefully choose which broker to listen to. No, not all real estate investments are “good” investments. At least in RE/MAX Capital, we carefully study which projects to push and we’ll offer the best ones.