When Bubbles Burst

When Bubbles Burst
Published: May 10, 2019

Most real estate presentations and articles talk about how the stars have aligned for the Philippine economy and how the time is ripe for people to invest in real estate. I haven’t really heard anybody talk about the flipside: what if a property bubble did exist and what if it bursts?

To have a better grasp of these bubble-burst episodes, we can take a look at the three most recent and historic bubble-burst episodes: Japan’s Property Bubble, the Asian Financial Crisis, and the Global Financial Crisis.

Japan’s Property Bubble: “The Lost Decades” (90s to Present)

Three decades after World War 2, the Japanese economy was once again a world super power. The Japanese dominated the global electronics industry, manufacturing a majority of the world’s consumer electronic products. As their economy grew, the government decided to deregulate financial markets. This meant that banks were given more power to choose whom to lend to and to determine what interest rate to lend at. With low interest rates, Japanese conglomerates borrowed recklessly to purchase real estate. The buying pushed property prices in Tokyo to increase by as much as 62% in 1987 (Takagi, 1989). At a point, Tokyo’s prime neighborhoods were 350 times more expensive than comparable properties in Manhattan (Colombo, 2012). With property prices increasing, conglomerates booked hefty profits and were able to borrow more money to invest into real estate.

By 1989, the government was alarmed by the ballooning property bubble so they tightened monetary policy, increasing interest rates by as much as 3% in a span of 3 months. Companies defaulted (due to higher interest payments); the stock market crashed; and property prices plunged. By 2004, real estate in Tokyo was only worth 10% of their 1990 peak (Barsky). Up to today, prices still haven’t recovered.

Philippine Property Market during the Asian Financial Crisis (1996 to 2003)

Coming from a revolution and a failed coup d’état, the Philippine economy was on its way to a great recovery in the early 90s. Buildings sprouted and the property sector was booming. During this time, it was common for developers to borrow in US dollars given that dollar loans had lower interest rates (5% to 6%) than peso loans (12% to 14%). Everybody was happy, until Thailand’s currency crisis.

In July 1997, the Thai Central Bank was forced to change its currency regime from a “fixed-currency” to a “floating-currency” system, after it ran out of US dollar reserves to support its policy. The Baht depreciated against the US dollar, falling from US$ 1 = THB 25 to THB 49. Fearing emerging market currencies would suffer the same fate; investors quickly sold their holdings of emerging market currencies, pushing them to devalue against the US dollar. The Philippine peso depreciated from a rate of US$ 1 = PHP 26.4 in June 1997 to PHP 42.7 in a period of 6 months.

As the Philippine currency depreciated, the country’s largest companies were at the brink of default from their dollar loans. Since these companies generated most (if not all) of their revenue in PHP, they needed more PHP to convert into US dollars to settle interest and principal payments. Philippine property developers were in turmoil. Property prices fell from their peak in 1997 and the construction of new developments halted. It took 6 years for general property prices to recover and reach their highs. Today, some properties still remain in litigation.

Global Financial Crisis (2006 to Present)

In 2001, the US economy suffered an 8-month long recession after the dot-com bubble burst. To boost the economy, the US central bank lowered its benchmark rate to 1% and the US’ housing boom ensued. Interest rates were so low that Americans could borrow money to purchase houses, rent them out, settle interest and principal payments, and still pocket sizeable profits.

Loans to people with no income, no jobs, and no assets (otherwise known as “NINJA loans”) became prominent. Buyers thought that they could always either flip properties for a profit or refinance the loan at a lower rate, especially since “property prices always increase”. More importantly, they failed to understand that their loans had “teaser rates”, and that these rates would eventually become higher. When the US central bank increased interest rates in 2004, people started to default from their loans. Properties were foreclosed and real estate prices bottomed. It took 13 years for prices to crawl back to their 2006 highs.

Take-Aways

These events show us that real estate investments are not immune to economic downturns. As pointed out by the Asian Financial Crisis, economic shocks may originate from external events/factors. Today, a number of risks exist including: rising global interest rates, a disorderly Brexit, and a military confrontation in the Korean Peninsula. But are these enough reasons to avoid investing in real estate?

In times of economic slowdown, no asset/investment/life is recession-proof. Your business is at risk; your job is at risk; even money kept in a vault is at risk (from devaluation). Real estate prices will also take a hit, but I argue that CERTAIN real estate investments will recover faster than other assets for the simple reason that they are tangible and useable. I’m not saying that you should put all your money in real estate. Global financial advisors recommend allocating 20% to 45% to real estate, depending on age. The younger you are, the more allocation you should have in real estate assets. You can mitigate the inherent risks to real estate investments by choosing which developers to buy from, which properties to buy, where to buy, and what price to buy at. This is where your trusted broker can help.

If you’re wary about a bubble in the condo market, then buy a lot/land. If you think lot prices in the metro are too high, then look in the fringes or outside where they are comparatively lower. Knowing your liquidity needs (do you want/need passive income from the property), risk appetite (are you conservative or risk averse), and investment horizon (how long you’re willing to wait) will help narrow down your options.

If you’re the type who would wait for the market to fall before buying, it’s easier said than done. The world’s most successful real estate tycoons agree that nobody can time the real estate market–not even them. If the pros can’t time it, how can you? Truth is, successful investors know how to create wealth at any point in a cycle. Time in the market is more important than market timing.

What about those who have bought condos at high prices; should they sell now? Based on what I’ve seen in the market, condo sales have started to slow down (and is continuing to do so). For example, some developers have established new rules/fees to prevent the “flipping” of units; extra incentives are given to brokers who are able to sell the remaining inventory at current prices; and some unit owners have decided to simply rent out their condos, instead of selling. This cooling down is actually essential and healthy for the market. I’ll be more concerned if average condo prices continued to rise above Php280,000 per square meter (read my article, The Need to Look Elsewhere).

The key take-away is this: asset bubbles form due to overconfidence and exuberance. They can burst due to unforeseen events. If you had one exit strategy (which is to “flip”) when you bought/buy real estate, what you’re doing is speculation (gambling). You may have profited from the practice before but you’ll have a more difficult time now (read my article, Days of the Quick Flip are Coming to an End). Real estate investment has always been meant for wealth preservation, not for capital growth. It has always been a long-term play.

If anything needs clarification or a trusted real estate broker, send me an email.

 

Juan Alfredo S. Patag
REB Lic.# 0023114; ID# 18-1612675 until 10/20/2022;
PTR#7335646 until 12/31/2019
M: +63 917 520.5826

LinkedIn: https://www.linkedin.com/in/juanpatag/
Facebook: https://web.facebook.com/jpatagrealestate/

RE/MAX Capital
7th Floor, 8 Rockwell, Hidalgo Drive, Rockwell Center, Makati City

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.

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The Big Jump

It was 9:48pm and I’m in front of a Bloomberg Terminal in my office…alone…on a Sunday. A few years back, I was a financial analyst of a local bank. During that time, I’d normally spend 13 hours a day in the office—not including the weekends.

 

Despite being rewarded well (in local bank terms), I came to the point where I wanted more. See, I dreamt big; and I mean BIG. Problem is, I didn’t know what I wanted exactly (though the usual dreams such as living in a mansion, driving a sports car, affording ivy league education for my kids did sound really enticing.) I was willing to sacrifice time, if it meant getting what I want. So there I was, thinking of what route to take. Eventually, I was convinced that boxing it out with ex-pats and playing politics was a dead end. So what’s next?

 

Whenever things bothered me, I think out loud in front of friends, hoping I’d get suggestions on how to solve problems. A few months later, I bumped into an old friend of mine who, after a long conversation, invited me to join his venture of putting up a real estate brokerage firm.

 

Initially I thought, I didn’t know much about real estate only that land prices were soaring in Manila and that developers were making a killing. Moreover, I never thought of myself as a salesperson. Actually, I hated talking to strangers (except when there’s liquid confidence, AKA alcohol). What attracted me though is the financial success brokers achieved. I heard (and verified) stories of how some of my broker friends were earning millions (north of Php5 Mn–net) a year! Consistently! That’s a full blown salary of local firm’s CEO! Some of them were even younger than me; people who even barely passed school! I thought if they could do it, so could a person who worked long hours and had a corporate background such as myself. Should be a walk in the park. Or so I thought.

 

And boy was I wrong.

 

Six months down from the time I became a real estate broker, I haven’t closed a single deal. I was living on my credit card, paying the minimum amount possible. I didn’t want to run to my dad for money (though I did a few times; thanks dad!) especially since I was in my 30s. I started to feel desperate. I worked on  Php11,000-a-month leases just to get by. There were times when I thought about going back to the corporate world where things may not be as exciting but provided a regular paycheck. The company we put up wasn’t going well either. We were running on fumes and we were scrambling to find ways to pay for rent.

 

Apparently, being a real estate broker or putting up a business wasn’t as simple as I thought. No, real estate brokerage was never rocket science (not anywhere as complex as financial derivatives). Real estate, however, requires a whole different skill set: patience, perseverance, humility. As my partner puts it, “this ain’t a job for the weak.” I never understood what he meant up until I was down.

 

Just to give you an idea of what I had to deal with:

 

Imagine dealing with government officials who claim, “o expired na yung SPA mo dahil two years ago pa yan!”  To which you reply in a VERY nice manner, “Ma’am, saan po naka lagay sa batas na nag e-ex-pire yung SPA?” And to which she answers in a very condescending tone, “Saan nakalagay sa batas na hindi nag-e-expire?”

 

Or the time when you thought you have a done deal since the seller accepted an offer but changed his mind, come signing day. Or your buyer backs out from a deal (which is very normal). The industry and the income was UNPREDICTABLE!

 

When you’re broke, have bills to pay, and not getting any younger, you’ll start to question everything. You’d be so lost you start to lose confidence.
How can I provide for a family when I can’t even afford to pay for myself?
How can I afford to go on a date or should I even try to “settle down”??
What happened to the MBA I took???

 

I felt lost; a failure. I reached the point where liquor no longer helps. I’d down a sleeping pill just to help me forget about my problems and fight another day. Sometimes, I  wished unfortunate things to happen just to make everything stop.

 

At the peak of my depression, a small deal closed (the ice-breaker). Two weeks later, another closed. Then another. And then a fat one.

 

Just like that, I was able to zero my credit card bill, pay back my dad and gain the self-confidence I lost.

 

Our real estate firm was somewhat a different story. While I recovered financially, our small company kept bleeding money. I seriously couldn’t get it. I applied everything I learned from graduate studies from Switzerland! Sales Force Management, Human Resource Management, Strategy, etc. We had to infuse additional capital to keep the company afloat.

 

During the dark hours, you can’t help but blame other people for things not working out. Heck, I even thought about leaving and just practice brokerage by myself, otherwise I’m going to end up broke infusing capital and continue to burn relationships!

 

I don’t want this article to sound dramatic, but honest to goodness—the one thing that kept me from leaving were the people behind me. If you take time to get to know the people around you, you’d be saddened by the stark realities of life. But here we were, providing livelihood to our employees, helping aspiring brokers get out of the same situations we were in! We were building something! Something positive!

 

And just as with the success of my new endeavor, the company began to shape up a few months later. Our associates went through the same ordeal until they landed deals; and then some big ones. Later on, we got more people to join the bandwagon. The business model was finally working. Three years from when we started the business, we achieved a LOT. At this time, we knew we were doing something right. I realized that business plans took time to work.

 

Just like in any business, the ebbs and flows are natural. The entrepreneurial path is a roller coaster ride: you think everything’s all well and dandy and then (BOOM!) another sink-or-swim problem comes by. The pictures that come out in social media or newspapers is never a testimony to life achievements. They are for the small successes.

 

On the financial aspect of things, I’m definitely earning more than my corporate job (even with the bonuses). I’m happy that, despite the problems I encounter, the sleepless nights, the drama, I know we’re on to something great. This is when I realized that it was never the fancy things that were going to make me happy. It was the “building-something” part—the feeling of building something and seeing it work; the joy that comes with having happy employees and associates; the shared success that is being celebrated with people who are happy for the group’s success; and the assurance that the success resonated even to the lowest people in the company.

 

After everything’s been said and done, I’m happier where I am now.

 

My dream is for our firm, RE/MAX Capital, to grow to more than a hundred agent strong; to unite a fragmented industry; to professionalize an industry coined to be the “Wild-Wild West”. We have a long way ahead of us, and we’ll need all the help we can get.

 

To those who want to earn more but can’t afford to leave their corporate jobs, RE/MAX Capital, offers a program that can earn you as much as 20% referral fee. That’s 10% more than the industry average. This is especially beneficial to those who have relatives buying properties left and right. Or those who are well connected with people who invests in real estate.

 

To those who are willing to take the big leap and jump to a promising industry, let’s talk and explore options.

 

To those planning to do real estate brokerage alone, ask yourself an honest question: which do you think people would trust more: a broker backed up by a successful global brand or a broker with none?

 

If any of these criteria fit you or if you were simply inspired and sparked by my curious mind, let’s sit down and talk about options.

 

Juan Patag
PRC Reg. No. 23114
RE/MAX Capital
7th Floor, 8 Rockwell, Hidalgo Drive, Rockwell Center, Makati
M: 0917 520-5826
E: jpatag@remax.ph

 

Ntoe: Special thanks to my friend, Katrina Calderon, for proof reading this article. 🙂

CAPITAL GAINS TAX TO BE INCREASED TO 20%?

CAPITAL GAINS TAX TO BE INCREASED TO 20%?
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, any other RE/MAX franchise, or of Rockwell Land. 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.
Published: December 4, 2017
Okay, we’ve been hearing rumors that the Capital Gains Tax (CGT) would be increased from 6% to 20% in the new Tax Reform Program of the government. They say this will be effective January 2018. While contacts in Regulators’ Offices claimed that this is a rumor, we’re surprised that even our clients heard about this. So let’s analyze what happens if they do decide to push through with this reform:

1. If CGT were increased to 20%, property owners would be better off putting all properties in a company where owners would just pay a total of 18% tax (12% VAT and 6% Creditable Withholding Tax [CWT]–both of which are deducted from the VAT-exclusive price, a lower base). Moreover, VAT and CWT can be offset by VAT-input and expenses. These give property owners the reason to put assets under a corporation.

2. In lieu of the previous insight, people would be setting up companies to put their properties in. Before, it took 2-3 months to setup a company; however SEC recently moved its office to Manila and I would assume this would make things slower as they adjust to the new office–4-6 months in my assumption. This would mean less secondary market sales in the following six months.

3. Given that sellers would get less proceeds (approximately 14% less from what they originally expected before the reform), they will make up for the decrease in proceeds by increasing the selling price. In effect, this would slow secondary market sales as less buyers can afford the higher prices. This would definitely greatly affect sales of secondary market properties in areas that have seen recent increase in zonal values (i.e. Makati).

4. Finally, what better way to avoid getting taxed by 14% more than by selling your property before the tax reform is implemented? It would be a natural decision for property owners to liquidate assets before the tax reform especially because, I believe, it would take a few years to recoup the expected loss (in case they choose to stick with their selling prices) if they had not sold their properties before. Prices in the Metro are already at their historical peaks (QC condo at Php145,000/sqm, Makati condos at Php330,000/sqm). It’s hard to imagine that the same amount of people would be willing to buy if prices increased even higher.

In sum:

Unlikely but possible. It is unlikely that legislators would pass this part of the reform (especially because I believe a lot of them own a significant amount of real estate). They would get affected in the process. However, history has proven that even the remote things may happen (minority winning the elections). Philippine politics is one of those uncertain things.

Price decline in the near future. We can’t undermine the fact that people will anticipate the possibility and act faster than the market. General prices would decline in the near future, especially in areas that have seen significant increases in value in recent years because they would want to take profit.

Invest in developing areas. With this amount of uncertainty, I would suggest investors to focus  or divert to their investments to developing areas which present higher capital appreciation potential where prices remain low and would be affected dramatically lesser since the tax bases are lower. Examples of which are Cavite and Nuvali.

Agree? Disagree? Would love to hear your thoughts. Email me at jpatag@remax.ph

A Commentary on Land Prices in High-End Villages

Land-Values

Just my two cents: General increase in land prices in prestigious villages mainly due to:

  • Prices shown in the graph are “highs”, average prices should be 10% to 15% lower.
  • Lots in these Makati villages are very rare. The low supply allows sellers demand exorbitant prices for their properties in these villages.
  • In the past 6/7 years, more people are entering the “ultra high net worth individual” space which in turn is attributed to bustling businesses/booming Philippine economy (it’s more common to see Ferraris and Lambos in recent years).
  • These are the people buying at those prices.
  • Optimism on Philippine economy have influenced the current ultra high net worth individuals to land bank.
  • What would be interesting to see is data prior to 2010. My guess is, the uptrend shown in the graph is also a recovery of prices from the dip in prices from the Global Financial Crisis back in 2006/2007.
  • Dip in prices in Green Meadows is due to the earthquake scare. Green Meadows is found near the fault line.
  • Increase in prices in Ayala Alabang due to the completion of Stage 2 (exit to Alabang’s South Station) back in April 2011.

Here’s the original article from Entrepreneur: http://www.entrepreneur.com.ph/news-and-events/which-high-end-villages-tripled-average-land-prices-in-the-last-6-years-a00200-20170925

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 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.