Friday, February 20, 2009

real estate crisis: is the philippines next?

I have always worried ahead. Months before Pinoys even learned about recession, I was already having panic attacks. This "paranoia" is not "really paranoia." I prefer to call it heightened awareness, an inborn sense of readiness, if you will. So let's not doubt me, okay? Just trust my instincts and assume the worst: The Philippines will experience a real estate crisis soon. You can quote me.

Photo from NYMag.Com

Why am I so pessimistic? (Is there any other way to be?)

Here is the reason:

Real estate loan defaults may skyrocket.

a. Let's look at paying capacity. A very big percentage of Pinoys with mortgages these days are Filipinos who work abroad (OFWs) and Filipino immigrants who reside and work abroad but intend to retire here. Most of them jumped right into the real estate game a few months before the US subprime mess - when their jobs were more secure and everything seemed rosy. Back then, a monthly amortization of $1,000 USD did not seem like a lot. But now that there are layoffs even in the most progressive economies of the world, more and more Pinoy expats are losing their jobs, and we can expect more job cuts in the coming months. Tell me, can all of them afford to continue paying their housing loans? Some of them can, but something tells me
most of them can't.

Another huge chunk of the mortgagee pie is comprised of newly-"affluent" professionals in the BPO industry. You know the type - call center team leaders who are paid anywhere from P80,000 to P100,000 monthly. They get a condo unit, pay at least P35,000 monthly, and spend the rest on Starbucks and cigs. Suddenly, big clients of their companies cancel their contracts (no thanks to the recession), and people get laid off left and right.

Profits are down; just look at Convergys. The government tried to play it down two months ago, but make no mistake: Accenture, Teletech, ACS, etc. have all downsized since. Other big players are downsizing slowly, trying not to create a media hype. The "continued hiring" is a farce; and we will all see this when the 2009 graduates try (and fail) to enter the job market next month.

Will the new affluent class be able to afford their pads? Some of them, yes, but most of them can't.

b. Now, let's look at interest rates. Housing loan rates from private banks are in the 11% to 12% zone this year, which is a lot higher than it was several years ago. This is great for my bonds (tiheeee!) but bad news for mortgagees.

Some people are rejoicing because of the interest rate cut in government-funded housing such as Pag-Ibig ... but I smell something fishy. Call me paranoid, but won't lower interest rates only mislead Pinoys who cannot really afford a home into thinking that they can afford a mortgage?

Let's say that Juan, whose salary is P30,000 a month, takes out a P900,000 Pag-ibig loan for which he will pay P11,000 monthly for 25 years. Juan could very well afford the P11k monthly amortization while he is gainfully employed, but it would be an entirely different scenario if recession hits his job.

If Juan was single and prudent (with a nest egg of P200,000 at least), his money would tide him over 6 months of unemployment, until (hopefully) the economy picks up. But most Filipinos are not single - in fact, many are married with children by the time they are 25. The average savings of Pinoys is worth only 9 weeks of their expenses. There are plenty of bills - cellphone, internet, Meralco, LPG. If Juan is like most Pinoys, he cannot afford P11,000 monthly of he suddenly loses his job. He
will default on his "low-interest" housing loan.

c. Now, the price bubble. Did you notice the rather rapid increase in real estate price tags in the Philippines, especially in the pre-selling sector? You can buy a pre-selling condo for P2.5 million, and it will be worth 4 million in 3 years. There is something wrong with this. It kind of reminds you of New York, or Los Angeles, where properties were way overpriced only to plummet several years later.

I believe that real estate prices here have yet to experience a "correction." Prices seem to be too high; they do not reflect the real WORTH of the asset. The market should correct itself.

Does this mean home prices in the Philippines will go down? No. IMHO, real estate prices won't plummet, but they will stagnate for two years (at least) in order to correct the bubble. So if you are looking to buy, don't hurry. Don't believe the marketing hype. You will still get that property for about the same price next year, no matter what the developer tells you.

* * * *

Opportunities ahead

When MSP and I first talked about the imminent mess that is Philippine recession, he said only one thing:

This is an exciting time.

He could be right.



Blogger Erica is Rich said...

I am winking too. After my initial panic, I realized that if I play my cards right I will be okay. :)

What I do not like is how the US government are saving industries like the car industry. They are clearly overproducing. Seriously, I do not like cars that much. It causes too much pollution and waste.

3:11 PM  
Blogger mussolini said...

yes, i agree! shouldn't they be funding green energy companies instead? something is wrong.

4:14 PM  
Blogger ennui said...

mussolini, if in case i win the lottery and have millions to play monopoly with, i'd LOVE you to be my financial adviser. i can relate with the "panic mode" you're in, except that despite this vision of economic apocalypse, i don't know how to go about saving myself (or my money).

12:51 AM  
Blogger mussolini said...

ennui> don't take any of my advice. i'm the worst budgeteer slash strategist this side of quezon city. i'm so financially immature; i still can't get past the allure of 'upgrading' when i know i could very well just scale back, stay liquid, let my money work for me. BUT YOU, i admire. it must be your chekwa blood.

7:06 AM  
Blogger ennui said...

sigh ... if only i can infuse more paychecks than chekwa, that would be awesome :)

3:54 AM  

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