Tuesday, June 21, 2011

Property bubble

June 17, 2011 | Manila, Philippines
Popular Economics
WHEN REAL estate prices drop sharply after rapid price increase, causing a scramble among real estate owners to sell properties in an attempt to avoid greater losses, the market is said to be experiencing a property bubble burst.

The Bangko Sentral ng Pilipinas (BSP) defines a bubble as the overvaluation of asset prices, much higher than their fundamental values.

Economic growth, high inflation and high demand usually raise property prices. Financial liberalization during the term of President Fidel V. Ramos raised property prices by more than 60% between 1995 and 1997, only to drop by 18% from 1997 to 1998 during the Asian currency crisis, according to real estate services firm Colliers International.

During a real estate boom, buyers purchase properties on easy credit, but are usually forced to sell at lower prices when the market become unsustainable.

University of Asia and the Pacific economist Cid L. Terosa explained that buying property for investment, and not for actual habitation or usage, increases the possibility of a property bubble due to the instability created by rapid buying and selling.

Speculation worsens this instability. “Property speculators create the view that something—a property—will be profitable in the future. They do so knowingly or unknowingly,” said Mr. Terosa.

He said the Philippine property market is strong nowadays. Demand for residential and commercial real estate remains high as banks continue to offer attractive loan packages and lower interest rates to buyers.

Megaworld Group, one of the country’s largest real estate corporations, has developed over five million square meters of property, and projected to build at least 18,673 residential units this year. According to residential property database Global Property Guide, a Metro Manila condominium costs as much as $2,500 per square meter as of October last year.

Banks know there is a market (Filipino property buyers) out there, and they fight to get that market,” Mr. Terosa said, adding that it is relatively easy for Filipinos to secure loans with little collateral.

But is a subprime crisis similar to the one that hit the United States in 2008 imminent in the country?

A 2010 BSP working series paper said no. “It is not far-fetched, but not so very likely,” said Mr. Terosa.

In the US, the capital market is more developed, credit is much easier to obtain, and loan amounts are much higher than in the Philippines, he explained.

The Philippines managed to avoid a property crisis during the Asian currency crisis despite having the biggest property price drop among affected economies, thanks to a cautious banking sector and a generally low real estate demand, Mr. Terosa said.

1 comment:

manila apartment said...

Real estate is really in demand today, that’s why many businessmen decided to invest into something like this expecting to earn more,which is not that easy because of the competition between other firms. They also tend to expand to other association in cities where businesses are apt to gain more profit as well as attraction to possible investors out there.