This is a guest post by Angie Espiritu of Filben Realty
The term “real estate bubble” sends shivers to many spines because of the fairly recent sub-prime bubble that happened in the United States. Stripping the word of all its technicalities, a real estate bubble is simply about spiraling prices and disappearing buyers, leaving some people holding a bunch of flaming balls with nobody to pass them on to. The flaming balls burn their cash.
To see if this will happen to the Philippines, let’s dissect the bubble.
Photo: marcusrg via flickr
The flaming ball allegory
Going back to the simple description above, there would have been no flaming ball if everyone was paying for real estate in cash. Like, one lifts Php4 Million from his pocket and buys a house from a convenience store, then sells that house a year later to a second owner who dips his fingers into his pocket, lifts Php6 million cash, and pays the first owner.
When a third owner buys it in cash for Php10 million and can’t sell it for any price higher than Php8 million, he’s the only one having a problem. The rest of the world goes on. The third guy can choose to hold the property until prices swing back up again. No big deal.
The flaming ball allegory happens when someone borrows money to acquire the property. Say, the third buyer above acquires the property for Php10 million through financing. He pays the bank Php100,000 monthly. Next thing he knows, prices have gone down and his property is now worth only Php7 million in the market. A friend who has bought a similar property at that price is paying the bank only Php70,000 a month.
The bubble bursts…
The third owner either keeps the flaming ball and waits it out til prices get better, or he cuts his losses by selling the house for Php7 million immediately and repays the bank for the balance some other way. This is when we say that the bubble bursts…
Or … he stops paying the bank and lets the bank take the overpriced property back! Imagine a million borrowers doing that. Cash flow stops and financing companies close down…or rescued. This is when we say there is a crisis.
Will that kind of thing happen in the Philippines?
Not likely. Here’s why.
1. We’ve been there. Banks won’t allow it the second time around.
In 1997, the scenario described happened. Banks learned from the lesson. The government learned a lesson too.
To rescue the banks, Congress passed The Special Purpose Vehicle (SPV) Act of 2002 or Republic Act 9182 (RA 9182 has been amended by RA 9343) to help banks get rid of non-performing assets and clean up their balance sheets. That helped substantially.
In turn, the banks made sure that they checked home mortgage loan applications more closely. They don’t want non-performing assets as much as restaurant kitchens hate rats, get the picture?
So, they made sure that a buyer made more than enough money to pay for the amortization of the loan, or they disapprove the application. Processes were (and are) strict, and this prudence paid off big time in succeeding crises that rocked the world.
2. Most of our buyers are end users of the properties, not speculators.
The likelihood that people buy a property with the intention of reselling it at a higher price is nil. Therefore the bubble is likewise nil.
(Jay Castillo: I believe true real estate investors are different from speculators as real estate investors buy properties that are below market value. Speculators on the other hand buy at market value and speculate property appreciation)
Most people in the market today buy a property for keeps. That’s a good thing. Even those who are paying Php15,000 or more a month have no qualms about renting their places out for less than that. “With money from the rent, I only need to raise Php ____ to pay the amortization,” you’d hear them say. That’s not the mindset of people who can cause a bubble.
In short, Philippine banks are effectively weeding out speculators with not enough capital to pay for the loans, while those who are able to secure the loans are not likely to resell them. Why would they? It’s their home!
Where can the bubble come from in this case? If you find it, tell me.
Have a great day!
Angelina B. Espiritu
Angie Espiritu is the owner of Filben Realty – Your partner for optimal real estate investments. She is a PRC registered licensed real estate broker and an MBA graduate of De La Salle University.