This is a guest contribution by Ian Mariano of Reno Home Blog (Author’s Note: This article was written to serve as an on going dialogue about current market tremors. You may post your questions at the comment section and I’ll try to answer them – Ian Mariano).
“You must never confuse faith that you will prevail in the end — which you can never afford to lose — with the discipline to confront the most brutal facts of your current reality, whatever they might be.” – Jim Stockdale
Last Wednesday, about to go home from work, I came across these alarming headlines in some of the leading business newspapers:
“An exodus from emerging markets threatens to hurt the financing and growth prospects of developing economies that have come to rely on large inflows of foreign capital in the wake of the global financial crisis.”
What do these frantic headlines mean for the general Philippine economy? A more pertinent question: How will this affect the average home owner/investor in the Philippines? I strongly believe it’s time to cut losses short or risk getting wiped out by this impending crash. In this article I will try to explain the reasons for this belief.
Sound the Emergency Alarm
In December 2012, I co-wrote a 3000 word open letter to President Benigno Aquino III. My goal for the letter was to“sound the emergency alarm in hopes that the Philippine government can start preparing for this financial catastrophe ASAP”. I wanted to heighten the urgency of “if” the market crashes to “when”.
I also said in the article that the Philippine housing market could crash in 2-4 years, perhaps sooner.
When the alarming headlines hit last week, the climate of opinion of so-called local experts and professional financial analysts, explaining the reasons for the the recent stock market bloodbath were a mixture of:
1) The refusal of Bank of Japan (and possibly, U.S Federal Reserve) to inject more stimulus money to its economy (through its bond buying program)
2) Foreign investors pulling billions of dollars from Asian markets to put in U.S market; and
3) The unexpected bad news for the Philippine economy–higher unemployment and exports down 12%.
All are valid reasons but only tell us the symptoms rather than the root cause. The reason is actually more simple: Worldwide Investors are cashing in on their profits–$2.7 billion dollars pulled from Thailand, Indonesia and the Philippines this month.
The Effects of Investments Pulled Out
That same money, $25 billion since 2008, poured into Thailand, Indonesia and the Philippines, caused the unprecedented growth in the Philippine economy in the last 4 years. No doubt, many will debate this. But the numbers speak for itself: [Southeast Asia] inflow of close to 120 billion US dollars in 2011 is five times the inflows in 2000.). As heroic as the Aquino administration has been in planting seeds in infrastructure and it’s people, it will still take years to mature.
The massive pullout of billions of dollars of foreign investors’ money will be the single biggest reason for the impending Philippine market crash. History is pregnant with examples of this domino effect: foreign investors flooding emerging markets with credit, which in turn causes consumers and local businesses to be “over-optimistic, to over-invest, and to over-produce.” The brunt of which was seen in the real estate industry.
I have to move on to what you could do to soften the impact of this crisis on your family.
Why You Have To Cut Your Losses Short
Here are some questions I have been asked through the years on what to do if the market is about to go into a recession. (If you have more questions not answered here, ask in the comments section at the end of this article.) Note: Answers are solely the authors opinion and is not meant as a legal advice.
What does cutting your losses mean?
If you are currently thinking or in the process of getting a property, don’t. Not now. Even if you don’t believe the Philippine economy is going into a deep recession, the current risks in the market far outweigh the potential rewards. Don’t forget the essential rule of investing: Minimize risk. And there are simply too many risks in the Philippine housing market right now.
An old Wall Street saying has it that when everybody’s getting into the market and even the shoeshine boy is giving stock tips (or the barber/hairdresser or the taxi driver or the waiter or the bartender), then it’s time to sell.
The property builder is giving me a great deal to get in the condo/house? Why shouldn’t I take this?
Rule of thumb: In a market downturn, property builders have their ears closer to the ground than the average consumer – they are first to know of problems in the real estate market because their company stocks are hit first before their inventory gets hurt by falling demand due to uncertainty of home buyers.
In short, they will try all they can to unload their inventory to property buyers who is unaware of the pending crash. They usually do this by giving sweet “deals”. A few examples: too-good-to-be-true down payment schemes, price discounts, any type of “signing bonus”.
Does cutting your losses short mean that I need to do absolutely everything to sell?
Yes. Do everything you can to sell your investments. Even if it means selling at a loss (losing your down payment or “reservation fees”). It is far better to take minimal loss than to be stuck with a fast depreciating asset. I know, this is a difficult thing to do. But know that great investors like George Soros know that they can’t be right all the time, and the secret is cutting your losses short when you know you’ve made a wrong decision. This will protect you to live another day when opportunity comes.
If I sell my property, I still need a roof on me and my family and If I buy another property it just defeats the purpose of selling because properties are just as expensive. It just seems that I wasted time and effort to be at the same financial place.
After you sell, do not buy. Rent. Rent as long as you can until the market is about to go up again. Generally, it takes 3 years for a housing market to hit bottom. Save money. Resist the urge to keep up with the Jones’ – no doubt people will question your decision to “downgrade”. Don’t wilt. It’ll pay off in the end.
I’m confused, Ian, in your article you almost interchange housing market with the stock market, why is this? Should I apply your urgency for both?
Yes. In many economic crises the housing market is what causes a country’s economy to fall apart (especially in emerging markets like Thailand, Philippines). The most recent examples of this is Spain and the U.S’s economy going on a downward spiral AFTER the their housing market’s bubble burst. The problems for the U.S economy didn’t start in 2008 when big bank like Bear Sterns, Lehman Bros. Filed for bankruptcies. It started in 2006 when housing market started it’s decline.
What could happen if I wait too long and the economy sinks into a deep recession?
Prices can drop as much as 50%. It’s much much harder to get out of a hole when the general public are in a state of panic. Consumer confidence will be depressed and people will not be spending money on previously attractive assets like real estate.
More than that, the economic depression takes a heavy toll on families and marriages. Financial problems are the #1 cause for breakup of many families. I’ve seen this happen here in the U.S. the last few years.
Can the Philippines avoid this crisis even as the other Asian economies tumble?
Hardly. As globalization grew, Asian countries are more inter-connected than ever. It is almost impossible to go up when the general market (Asia) is on a freefall. Like in stock markets, 3 out of 4 stocks fall when the general market is headed downward.
Ian, you sound too sure of yourself, what if this dire economic situations you say doesn’t come to pass?
Praise God. I will be the happiest person if I turn out to be wrong. But the fact is there simply is more to lose than to gain if indeed the Philippine economy goes into a full-blown crisis.
I am perfectly willing to be a laughingstock rather than not do my part in warning the Filipino people. I am reminded of the character of Jesus who is full of grace and truth. “The Truth shall set you free.”
As I wrote in my open letter…
“When a housing market breaks down, as we have experienced first-hand, the biggest casualty will not be stock markets or tumbling currencies, it will be the family. It is they that suffer the most because few will see the crisis coming.”
God bless you and our family and may we cling to our tender-loving God and not external things, whatever the future may hold.
Ian Mariano has worked with Joe Salcedo under Chase International real estate, the number one luxury real estate company in Reno-Tahoe. Since 2005, they’ve been one of the top producers in Northern NV focusing on market knowledge that have given homeowners a step ahead in anticipating market trends. They have successfully followed the Northern Nevada housing market from boom to bust and correctly called the market’s absolute peak in August 2005 as they advised their top investors to “cut losses short”. They were also the first ones to be optimistic about the market in late 2010 as demand surged and housing inventories dwindled . Their group’s story, past research and articles can be found here: Reno Real Estate.
You may email Ian Mariano [email protected]