Is the Philippines at Risk of Experiencing Housing Bubble?

I recently read the article written by Liang et al. (2024) entitled “All that glitters is not gold: Examining the negative impact of real estate value on companies’ market competitiveness”[1]. Basically, this article talks about whether or not the crowding-out effect of state borrowing could surpass the collateral effects of increasing the market competitiveness of manufacturing companies in China. It is clear that the Philippine economic situation is totally different from the economic situation of China. For example, ever since the Chinese government embraced globalization, China's manufacturing sector has strengthened while the Philippines' manufacturing sector has weakened. Instead of depending on the local manufacturing sector, a large portion of the Philippines' GDP comes from Overseas Filipino Workers (OFWs) and their remittances[2].

Both China and the Philippines are borrowing money to financially support long-term economic growth. In reference to the article written by Liang et al. (2024), I wonder whether or not the government's decision to borrow money creates a 'crowding out' or 'crowding in' effect on the Philippines' real estate industry. In this article, I will discuss the current macroeconomic situation of the Philippines followed by a close examination of what is really going on in the Philippines' real estate industry. To draw a clear picture, I use economic and financial terms such as crowding out/crowding in, trade and fiscal deficit, housing bubble, credit crunch, and non-performing loans (NPLs) all throughout the main discussion. Hopefully, this article will help all of us understand why the number of homeless people in the Philippines is still high even though construction businesses in this country are growing at a fast pace.

Problem Statement

A high inflation rate combined with a high interest rate will certainly make the cost of housing more expensive, particularly among low-income families. Right now, there is an increase in construction by private real estate developers and contractors[3]. However, residential homes being developed today are affordable homes[4]. To reduce the number of families with no home, the Department of Human Settlements and Urban Development (DHSUD) are trying to create more socialized housing projects, a.k.a. affordable housing units for the less fortunate families, whereas the National Housing Authority (NHA) provide the less fortunate families with housing assistance[5], [6].

As of 2024, the estimated total value of real estate market in the Philippines is worth US$6.06 trillion; 87.3% of which is dominated by residential real estate[7]. Despite the government's efforts to eradicate homelessness in the Philippines, socio-economic problems related to a shortage of affordable homes continue to persist. As of November 2022, DHSUD reported that the Philippines has a 6.5 million housing backlog, which may increase to 10 million by 2028[8]. With this in mind, Table I summarizes the figures showing that the housing surplus on high-cost housing and mid-cost housing is as high as 224,011 and 250,403, respectively, whereas the housing deficit on socialized housing, economic housing and low-cost housing is -663,283. -1,962,077, and -462,160, respectively.

Market Segment	Housing Demand	Housing Supply	Surplus (Deficit)
Socialized	1,143,048	479,765	(663,283)
Economic	2,503,990	541,913	(1,962,077)
Low-Cost	704,406	242,246	(462,160)
Mid-Cost	72,592	322,995	250,403
High-Cost	18,235	242,246	224,011

Table I – Housing Surplus/Deficit on Five (5) Types of Market Segment[9]

Economic Situation in the Philippines

The number of Filipino workers working abroad increased by 7.6% from 1.83 million in April-September 2021 up to 1.96 million during the same period in 2022[10]. In fact, the Philippine economy has long been dependent on its human resources, more specifically, the OFWs’ remittances[11]. Today, almost 10% of the entire Philippine population is currently working overseas. Representing 8.9% of the country’s gross domestic product (GDP), the Banko Sentral ng Pilipinas (BSP) reported that the total cash remittances coming from the OFWs last December 2022 alone has reached as much as US$3.49 billion[12].

The inflation rate in this country went up to as high as 8.7% in January 2023 because of an increase in domestic consumption, a steady inflow of remittances, improvements in commercial activities related to transportation and storage (13%), financial services (9%), and construction business (9%), an increase in wages, improvements in the overall job market, an increase in public infrastructure spending, and improvements in digital financial services[13]. Therefore, Finance Secretary Ralph G. Recto mentioned that the top priority of the Philippine government as of the moment is to “keep the prices of goods and services stable and affordable," which can be done by reducing the inflation rate to a range between 2% to 4% level[14]. Using monetary policy, the BSP decided to increase the lending rate to 7% in mid-September 2023 up to the present time[15], [16], [17]. By the end of 2024, the expected growth rate of the Philippine economy is between 5.5% and 6.0%[18], [19]. To avoid weakening the Philippine economic growth, BSP may reduce interest rate by mid-2024[20].

General Facts on Trade and Fiscal Deficit

A trade deficit happens each time the export of goods is less than the import of goods[21]. The Marcos administration narrowed down the trade deficit from US$5.56 billion in January 2023 to US$4.22 billion in January 2024 by reducing imports of goods while increasing exports of goods[22], [23]. However, due to ongoing geopolitical uncertainties such as the possible war between China and the U.S. and the slow growth in global market demand, the trade deficit in the Philippines remains high[24]. A trade deficit is different from fiscal deficit such that a fiscal deficit happens each time the government’s available budget coming from the collected taxes is less than the government’s annual expenditure[25]. Using fiscal policy, the government could either sell assets, print money, or borrow money to financially support infrastructure development and social projects related to health and education[26], [27]. In times when the fiscal deficit is high, most governments will borrow money from domestic and international sources instead of printing money to preserve the purchasing power of money[28]. In November 2023, the Department of Finance published a news report stating that the Philippine government was successful in reducing the country’s fiscal deficit from Php1.01 trillion in the first quarter of 2022 down to Php983.47 billion in the first quarter of 2023[29].

Crowding-In/Out Effects of Government Borrowing on Private Investment

Crowding out is a reduction in total aggregate private expenditure (i.e. private investment and consumption) as government expenditure increases[30]. Provided that the economy is at full employment, an increase in government spending using borrowed money could increase interest rates, which subsequently makes mortgage loans less attractive on the part of private investors[31]. Most developed countries are using expansionary fiscal policy as a tool to avoid economic recession in times of global financial crisis[32]. However, expansionary fiscal policy such as financing government expenditure through debt can lead to “little, no or even negative effects on output”[33]. For example, each time the interest rate is high, the cost of borrowing money to purchase real estate properties becomes more expensive. In this context, the effects of ‘crowding out’ may harm the long-term growth of the real estate industry since private investment becomes less profitable in times when the interest rate is high[34]. The crowding out effects on private investment could take place either directly (i.e. decrease in the available resources for private sector) or indirectly (i.e. increase in market prices and interest rates)[35].

Contrary to the point-of-view of Neo-classical economics, there were cases wherein an increase in government expenditure through borrowing could complement an increase in private investment (i.e. ‘crowding in’ from the Keynesian point-of-view)[36], [37]. For instance, assuming that the unemployment rate is high, an increase in government expenditure through loans or domestic borrowing means creating more job opportunities for people. Because of the significant increase in employment rates, total private investment and consumption will increase. In reference to the Keynesian point-of-view, it is unlikely that the economy will reach a 100% employment rate[38]. Assuming that the implementation of a fiscal multiplier technique supports growth in private sector, an increase in government spending may increase the overall output of the economy[39].

Housing Bubble and Its Short-Term and Long-Term Effects

A bubble occurs when there are “abnormally inflated housing prices” caused by investors’ decisions to massively purchase property, which temporarily increases the demand and prices of real estate[40]. Due to speculative buyers, demand for housing will increase, causing the market price of housing to increase[41]. However, in the long-run, excessive construction of new houses can lead to subprime mortgage problems, which could result in a serious economic and financial crisis caused by a higher number of non-performing loans (NPL)[42].

In history, we have seen cases of housing bubbles during the 1997 Asian financial crisis and the 2008 global financial crisis[43], [44]. Due to the global financial crisis or any cases of pandemic, such as what we recently encountered during the 2019 COVID situation, some investors who purchased real estate on mortgage were unable to pay their loan on time[45]. As a result, banks and other domestic or international lenders were at risk of having a buildup of NPLs[46]. In most cases, a huge accumulation of NPLs can lead to banking crisis where banks and other financial institutions become insolvent[47].

NPLs are unpaid loans that fail to generate income over a period of at least 90 days[48]. Aside from increase in deposit liabilities which reduces the banks’ capital, a high number of NPLs may reduce the level of private investment and consumption[49], [50]. When left unresolved, the buildup of NPLs can lead to a short-term economic contraction and credit crunch[51].

Strategic Ways to Avoid Risks of Non-Performing Loans (NPL)

There are ways in which the Philippine banking system can avoid liquidity problems and bank collapse. For instance, Philippine law requires the local banks to collect valuable assets from the loan applicants as collateral (i.e., vehicles, real estate property, or valuable equipment)[52], [53], [54]. Collateral can be “overstated”[55]. To protect banks from collecting “overstated” collateral, the Central Bank of the Philippines mandated that the maximum value of real estate collateral should only be “sixty percent (60%) of its value as appraised by a licensed appraiser[56]. Furthermore, except for free-hold property[57] which may account for “90% of the appraised value of the collateral, the loan valuation of usufruct, lease, and right to occupy and/or build should only be “70% of the appraised value of the collateral”[58]. Furthermore, it is the duty and responsibility of each bank to carefully screen the creditworthiness of each loan applicant[59]. In doing so, banks and other financial institutions can avoid the risks of insolvency[60].

Discussion

Considering the ongoing improvements in the Philippines’ commercial activities and the government's ability to narrow down trade and fiscal deficits, there is no doubt that the Philippine economy is doing well. In fact, the Philippine Statistics Authority (PSA) reported that the employment rate in the Philippines was as high as 95.5% in January 2024[61]. However, continuous economic growth has triggered an increase in the inflation rate. To keep the market prices of goods and services under control, BSP had no choice but to temporarily increase the interest rate to 7%[62], [63], [64].

As the Philippine economy improves, the government will continue to borrow money to financially support the fiscal deficit caused by an increase in government expenditure. As of March 2024, the Philippine’s unemployment rate was only 4.5%, but the underemployment rate is still as high as 13.9%[65]. As mentioned earlier, ‘crowding out’ is characterized by a significant reduction in the total aggregate private expenditure, which includes private investment and consumption. Since the underemployment rate in the Philippines remains high at 13.9%, it is unlikely that an increase in government expenditure could result in ‘crowding out’. From this point of view, an increase in Philippine government expenditure could somehow complement an increase in both private investment and consumption (i.e. ‘crowding in’). Overall, this assumption can be supported by the fact that an increase in government expenditure will create more job opportunities for those who are underemployed.

Because of the multiplier effects, there is a strong possibility that an increase in government spending will increase the overall output of the economy. Right now, there are signs that the Philippine government is in strong control of our economic situation. For instance, the only reason why the BSP decided to increase the interest rate to 7% was to avoid further increases in the inflation rate. If the BSP did not increase the interest rate to 7%, the purchasing power of the Philippine peso could weaken. As soon as the inflation rate goes down to its lowest possible level, the BSP will reduce the interest rate in order to lower the cost of borrowing money for private investment and consumption purposes. Overall, this is a good sign that the Philippine government has been creative and wise in terms of using both fiscal and monetary policy to create a balance in the current economic situation.

So, what does the current economic situation imply for banks, investors and the Philippine real estate industry? Well, a spot cash payment would more or less give investors the benefit of getting a huge discount from developers. Likewise, it also protects investors from the risk of losing valuable assets to banks. Unless local and foreign investors are capable of paying full payments in cash, it is best to wait until the interest rate normalizes at its lowest possible level. In doing so, the cost of borrowing money for real estate investment could go down accordingly. Otherwise, paying high interest on top of the loaned amount of money could only increase the risk that the borrowers will default on the payment of the mortgage loan (i.e., interest plus principal). Default on a mortgage loan can lead to mortgage foreclosure, which means that borrowers can lose their collateral to banks. In times of unfavorable incidence, such as losing job security or having to pay a high cost of medication due to serious health problems, borrowers may end up losing a large sum of money and valuable assets instead of establishing long-term wealth.

The Philippine construction industry is on the rise. In fact, Oxford Economics and Aon reported that the construction business in the Philippines is one of the fastest growing markets by the end of 2048[66]. In history, the housing bubble can lead to subprime mortgage problems, which eventually can lead to serious economic and financial crisis[67], [68]. Among the common signs of a housing bubble are the following: (1) a fast yet unsustainable increase in the market price of residential properties, which ends up plateauing after reaching a skyrocketing high; (2) risky lending practices that excessively increase the number of mortgage debts; (3) an increase in mortgage rates; (4) excessive construction of new properties due to high market demand; (5) speculative activities on the part of investors; and (6) an economic recession due to fewer job opportunities, an increase in massive job layoffs, and a lesser disposable income[69]. In reference to the common signs of a housing bubble, do you think that the Philippines is at risk of a housing bubble?

The construction business in this country is on the rise. However, I do not see any clear economic signs that the Philippines is at risk of experiencing a housing bubble. First, there is evidence that the Philippine economy is improving. Because of the high employment rate and more job opportunities for those who are underemployed, people in this country are expected to have more disposable income for real estate. Second, CEIC (2024) reported that the average growth rate of house prices in the Philippines was only 4.5% between March 2015 and September 2023[70]. In fact, house prices in the Philippines were at their highest point at 26.6% back in June 2020 and at their lowest point at -9.4% back in June 2021[71]. Year-to-year house prices in the Philippines increased only up to 12.9% in September 2023, which is lower than 14.1% year-to-year house prices back in September 2022[72]. Based on these figures, I would say that the housing price increase in the Philippines is highly sustainable rather than reaching a skyrocketing high. Third, the local banks in the Philippines are practicing strict measures when it comes to screening mortgage loan applicants. Therefore, it is unlikely that the Philippine banking industry would encounter an excessively high number of NPLs and mortgage debts.

To earn the highest profit possible, most developers in the Philippines are building residential properties for middle- to high-end society. This explains why this country has a surplus in the supply of more expensive housing (Refer back to Table I – Housing Surplus/Deficit on Five (5) Types of Market Segment)[73]. So, what can we do with millions of people who do not own a house? Well, I guess the Marcos administration will have to play a significant role in narrowing down housing deficits amongst the indigenous people and low-income families. To build more socialized housing, the Philippine government should work closely with DHSUD and other allies. By constructing high-rise socialized housing projects, the government can maximize the use of its limited land resources. Over the years, a lot of our professional engineers and architects have gained vast experience in building good-quality residential condominiums for middle- to high-class societies. Therefore, the Philippine government should hire experts who can design and build affordable yet sustainable residential condominium units for families with limited incomes. This way, the government can gradually eradicate the existence of homelessness in the Philippines.

Conclusion and Recommendations

There are no economic signs or indicators that the Philippines will experience a housing bubble in the near future. Instead of ‘crowding out’ effects, we are currently experiencing ‘crowding in’ effects as the Philippine government borrows money to support the increasing public expenditures. With continuous development in both the private and public sectors, there is no doubt that the Philippine economy will reflect substantial economic growth over the next 5 to 10 years. However, there is currently a clear imbalance in the supply and demand for housing available for different types of market segments in the sense that there is an oversupply of expensive residential condos and an undersupply of low-cost residential condos (i.e. socialized, economic, low-cost, mid-cost, and high-cost). Because of strict banking regulations, Filipinos without valuable assets to show as collateral to banks, cannot purchase a house. Therefore, housing bubble similar to what the United States is prone of experiencing, is unlikely to happen in the Philippines.

To solve the housing crisis, the government under the Marcos administration should allocate more resources to the creation of modern yet affordable socialized housing projects, which the public could finance through the Pag-IBIG housing loan. As the government strives to strengthen and improve access to socialized housing projects, it is best to educate the public on how they can benefit from the Pag-IBIG Fund's affordable housing loan. Second, it was stated under section 18 of the Republic Act No. 7279 (RA 7279), a.k.a. the "Urban Development and Housing Act of 1992, as amended by RA 10884, that the owners or developers of condominium projects and residential subdivisions must create a socialized housing area equal to 5% of the total area or cost of the condominium project, or at least 15% of the total area or cost of the subdivision project respectively[74]. Perhaps increasing the required percentage allocation for the development of socialized housing projects will help narrow gap in property ownership between the low-income families and those who are categorized under the middle- and high-class society. Third, the government should impose strict rules and penalties to owners or developers who would sell socialized housing projects or units to individuals who already own at least one property under his or her name. The same penalty should apply to buyers who will purchase socialized housing projects or units only for asset building purposes. Creating a law that penalizes misuse and misallocation of socialized housing projects will motivate private owners and developers to carefully screen those individuals who intend to purchase socialized housing projects.

References

[1] Liang, F., Tian, G., Wei, Z., & Zeng, A. (2024). All That Glitters is Not Gold: Examining the Negative Impact of Real Estate Value on Companies’ Market Competitiveness. The Journal of Real Estate Finance and Economics.

[2] Atos, L., Cruz, E., Hong, S., Kim, S., & Soliven, M. (2022, May 12-13). Life Challenges and Goals of Overseas Filipino Workers. Retrieved from 4th DLSU Senior High School Research Congress.

[3] Agcaoili, L. (2024, February 17). BSP may cut rates by mid-2024. Retrieved from PhilStar Global.

[4] Lyons, D. (2023, October 16). How housing costs in the Philippines impact poverty. Retrieved from Borgen Project.

[5] Hilario, E. (2023, November 3). Affordable socialized housing (Opinion piece by Ernesto M. Hilario). Retrieved from Philippine Institute for Development Studies.

[6] Philippine Institute for Development Studies. (2022, November 19). Housing. Retrieved from https://www.pids.gov.ph.

[7] Statista. (2024). Real Estate - Philippines. Retrieved from https://www.statista.com.

[8] Supra note 6.

[9] Rapisura, M. (2023, August 10). Understanding the housing crisis in the Philippines. Retrieved from SEDPI.

[10] Cervantes, F. (2024, February 29). Economic Cha-cha to end Pinoys' dependence on overseas jobs. Retrieved from Philippine News Agency.

[11] See supra note 2.

[12] Lu, B. (2023, December 29). Overseas Filipino workers and the holiday season. Retrieved from Philippine News Agency.

[13] See supra note 3.

[14] Department of Finance. (2024, March 5). Recto: Feb inflation rate of 3.4% within gov’t target band, PH prepared to face threat of El Niño. Retrieved from https://www.dof.gov.ph.

[15] BSP. (2024, March 17). Statistics - BSP Key Rates. Retrieved from https://www.bsp.gov.ph.

[16] CEIC Database. (2024). Philippines Policy Rate. Retrieved from https://www.ceicdata.com.

[17] Central Banking. (2024, February 15). Philippine central bank holds rates. BSP warns against upside risks, despite receding inflation. Retrieved from https://www.centralbanking.com.

[18] Canto, J., Renz, F., & Villanueva, V. (2024, March 7). The Philippines economy in 2024: Stronger for longer? Retrieved from Mckinsey.

[19] Philippine Institute for Development Studies. (2024, February 17). PH growth steady in 2024 but strategic policies needed. Retrieved from https://www.pids.gov.ph.

[20] See supra note 3.

[21] Jain, T., & Ohri, V. (2024). Introductory Macroeconomics for Class 12 | CBSE (NCERT Solved) | Examination 2023-2024. VK Global Publications.

[22] See supra note 18.

[23] Trading Economics. (2024). Philippines Balance of Trade. Retrieved from https://tradingeconomics.com.

[24] See supra note 18.

[25] Parameswaran, S. (2022). Fundamentals of Financial Instruments. An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives. Wiley.

[26] Ibid.

[27] Rajan, R., & Asher, M. (1997). The Macroeconomics of Financing Government Expenditure: A survey of the static consequences. Singapore University Press.

[28] See supra note 25; Gonzales, A. (2023, August 27). Gov't gross borrowings up in June. Retrieved from Philippine News Agency; Cordero, T. (2023, August 3). Philippines to borrow P2.46T in 2024 — DBM data. Retrieved from GMA News.

[29] Department of Finance. (2023, November 10). Govt congratulated on better-than-expected actual budget deficit outturn for 2023. Retrieved from https://www.dof.gov.ph.

[30] See supra note 27, p. 39.

[31] Ibid.

[32] Balcerzak, A., & Rogalska, E. (2014). Crowding out and crowding in within Keynesian framework. Do we need any new empirical research concerning them? Economics & Sociology, 7(2), pp. 80-93.

[33] Blanchard, O. (2008). Crowding Out. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan (pp. 1-4), p. 1.

[34] Sen, H., & Kaya, A. (2014). Crowding-Out or Crowding-In? Analyzing the effects of government spending on private investment in Turkey. Panoeconomicus, 6, pp. 631-651.

[35] Ibid, p. 631.

[36] Ibid.

[37] Supra note 27.

[38] Supra note 34.

[39] Ibid.

[40] Casey, C. (2018). Policy Failure and Irish Economic Crisis. Palgrave Macmillan.

[41] Dieterle, D. (2017). Economics. The Definitive Encyclopedia from Theory to Practice. Bloomsbury.

[42] Ibid.

[43] Adelino, M., Schoar, A., & Severino, F. (2018). The Role of Housing and Mortgage Markets in the Financial Crisis. Annual Review of Finance and Economics, 10, pp. 25-41.

[44] Chakraborty, S. (2016). Real Estate Cycles, Asset Redistribution, and the Dynamics of a Crisis. Macroeconomic Dynamics, 20, pp. 1873-1905.

[45] Li, S., Liu, J., Dong, J., & Li, X. (2021). 20 Years of Research on Real Estate Bubbles, Risk and Exuberance: A Bibliometric Analysis. Sustainability, 13, 9657.

[46] Garcia-Lamarca, M. (2022). Non-Performing Loans, Non-Performing People. Life and Struggle with Mortgage Debt in Spain. University of Georgia Press.

[47] Ibid.

[48] Fofack, H. (2005). Nonperforming Loans in Sub-Saharan Africa. Causal Analysis and Macroeconomic Implications. World Bank.

[49] World Bank. (2020). South Asia Economic Update, October 2020.

[50] Gortsos, C., & Monokroussos, P. (2018). Non-Performing Loans and Resolving Private Sector Insolvency. Experiences from the EU Periphery and the Case of Greece. Springer International Publishing.

[51] International Monetary Fund. (2021). Resolving Nonperforming Loans in Sub-Saharan Africa in the Aftermath of the COVID-19 Crisis. International Monetary Fund.

[52] Fox, M. (2022). Mechanism and Methods of Early Prevention of Bank Insolvency. DLSU Business & Economic Reviews, 31(2), pp. 25-33.

[53] Banko Sentral ng Pilipinas. (2018b, December 31). 303 Secured Loans and Other Credit Accommodations. Retrieved from https://morb.bsp.gov.ph.

[54] Gochoco-Bautista, M. (2000). The Past Performance of the Philippine Banking Sector and Challenges in the Postcrisis Period. AIRC.

[55] Asian Develoment Bank. (1999). Rising to the Challenge in Asia: Philippines. Asian Develoment Bank, p. 48.

[56] Supra note 53.

[57] A “free-hold” means that the property owner owns the land where a house or building is built on.

[58] Banko Sentral ng Pilipinas. (2018a, December 31). Appendix 85. Appraisal and Loan Valuation Framework for Rights-Based Secure Tenure Arrangements as Collateral Substitutes. Retrieved from https://morb.bsp.gov.ph.

[59] Supra note 52.

[60] Ibid.

[61] PSA. (2024, March 8). Employment Rate in January 2024 was Estimated at 95.5 Percent. Retrieved from https://psa.gov.ph.

[62] Supra note 15.

[63] Supra note 16.

[64] Supra note 17.

[65] Supra note 61.

[66] Desiderio, L. (2023, April 23). Philippine Seen as Among Fastest Growing Construction Markets in 15 Years. Retrieved from The Philippine Star.

[67] Supra note 40.

[68] Supra note 41.

[69] Adam, J. (2023, August 21). 5 Key Signs of a Housing Bubble. Retrieved from Nasdaq.

[70] CEIC. (2024). Philippines House Price Growth. 2015-2023 Quarterly (%). Retrieved from CEIC.

[71] Ibid.

[72] Ibid.

[73] Supra note 9.

[74] HLURB Administrative Order No. 02, S. 2018 – Resolution No. R-965, S. 2017, Revised implementing rules and regulations to govern section 3, 18 and 20 of Republic Act No. 7279, Otherwise known as The Urban Development and Housing Act of 1992, as amended by Republic Act No. 10884, otherwise known as “Balanced Housing Development Program Amendments”. Retrieved from https://elibrary.judiciary.gov.ph/thebookshelf.

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