Due to being one of the world’s finite yet most sought after resources, the real fair market value of almost all real estate properties, including residential properties, have expected to accrue especially in the long run. That is why many investors would grab any opportunity to have their own share of the land – this might be either due to market adjustments or government intervention through monetary policies because of its high expected yields overtime. However, like any other investments, venturing to real estates has its own risks that must be well considered and weighed. At times, these risks are disregarded due to the notion of a constant increase in the fair market value of any real property . Thus, Bria Homes will walk you through to one of the risks this kind of investment posits, the real estate bubble and its application in the Philippine market.
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What does bubble mean in real estate?
Real Estate Bubble, also referred to as housing bubble or residential bubble, refers to the increase in the housing prices exacerbated by higher quantity demanded, other non-price determinants like speculations, deregulated real estate financing market, or extreme forms of mortgage-based derivative products, and exuberant spending causing the market price of any real estate unstable and unsustainable.Though historically, market value of real property continues to increase; making the investors to invest by pouring in huge amounts of money in the hope of higher returns as housing prices, or any real estate property for that matter, continue to run-up. And as the price continues to rise, it will become too expensive for buyers to purchase thus, the bubble continues to inflate until the market “pops” or collapses.
To provide a historical example, in the United States, the 2008 financial crisis brought their economy, and many other economies, to recession and for others, depression. During the first decade of the new millennium, the housing or real estate market in the country was seen to continue to increase for years to come. Thus, to support the growing demand, financial institutions in the US like banks sell to investors the collected mortgages that homebuyers seek from them to purchase any property. For these banks to sell more mortgages to investors, they need also to attract homebuyers that will avail of their mortgage loans. As such, these institutions resulted in various means like lowering the interest rates, approving the mortgage application without thorough underwriting, longer duration for paying the loan, among others.
While investors poured in huge amounts of money in the real estate market, the bubble popped making them indebted and many declared bankruptcy. Even individuals who bought their dream home during the bubble suffer as well as the banks increase further the interest rate. The increased interest rates caused the monthly mortgages of borrowers to increase, too. As a result, properties acquired during the bubble were resold in a process called foreclosure to save the loan. However, due to an economy in a recession and unprecedented inflation rate, people tend to cut their expenses and opt to save rather than to spend making the properties for foreclosure become difficult to resell. The supposed well-thought policies concerning the real estate market collapsed, causing the whole economy of the United States to enter into a period of recession.
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Is a Real Estate Bubble Possible to Happen in the Philippines?
Economists remain confident that the real estate market in the Philippines will be able to hurdle the aftermath of the ongoing, but improving pandemic situation. During the height of the mobility restrictions, many individuals and enterprises, especially those in the IT-BPO sector, decided to adopt the work-from-home (WFH) set up as an alternative measure to prevent the spread of the virus.This leaving the office spaces vacant and as the demand for these spaces to continued to decrease, its fair market value followed, causing damages to the real estate developers.
The pandemic also has its silver lining. We have seen a partial deurbanization. Enabled by the WFH set-up, many returned to the provinces without compromising their livelihood. Furthermore, in 2021, the Philippine Statistics Authority (PSA) recorded an increase in the construction industry in the Philippines and it is fueled by the increased demand for affordable housing, especially in areas outside the National Capital Region, because of the need for open spaces to prevent the virus transmission. According to the said report, the total of approved building permits in the fourth quarter of 2021 was at 38,263, which registered an annual increase of 7.5%.
Further to the report, residential construction posted a greater contribution to the total approved building permit recorded during the quarter with 27,998 construction or 73.2% of the whole. Residential construction increased by 8.1% compared with the same period in 2020. Most of the total residential constructions were single-detach houses mostly constructed in areas outside Metro Manila, mostly in the CALABARZON or Region IV-A. In Metro Manila, with 2,593 approved residential permits, the most common type of residential construction was condominium units.
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The increasing construction of residential units is seen as a positive indicator as the Philippine economy bounces back from the effects of the prevailing health crisis. According to the Senior Economist of the ING Bank Manila Mr. Nicholas Mapa, referring to the report of the PSA, “This trend suggests that the Philippines is also experiencing the global phenomenon of migration from the urban centers to the areas outside the city with Filipinos in search of more space. After being locked down in the city for more than a year, it’s no surprise that there is now a natural and healthy demand for property and homes outside the city,” he said.
Despite the rise in building permits issuance, Mr. Mapa said “signs of a real estate bubble have yet to manifest in a palpable manner.” This observation of Mr. Maps is also in coherence with the most recent report of the Bangko Sentral ng Pilipinas (BSP) on Residential Real Estate Price Indices (RREPI). RREPI is the indicator of change in the prices of residential properties in the country over a period of time. In simpler words, it’s the measure of the house price inflation. The Index covers Metro Manila and other areas outside of Metro Manila (AONCR) as well as different types of residential units like single detached houses, townhouses, and condominium units to be able to measure real estate price changes across different areas and types of housing units.
The BSP comes up with this quarterly report through the data they collected from the Bank Quarterly Report on Residential Real Estate Loans (RRELs). As mandated by the BSP Circular No. 892 in November 2015, all universal, commercial, and thrift banks to submit reports in RRELs granted in a given quarter to individuals for the purpose of financing the acquisition of housing units and any related land.
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