Construction accounts for about 9% of total economic output. It is two-thirds private and one-third public. Hence, robust growing public construction coupled with an anemic (falling) private construction would likely result in a zero (negative) growth industry. In the first quarter of 2012, public construction zoomed 62.2% while private construction contracted 9.9% — overall construction grew by about 3.6%.
It would be unwise to expect that public construction will continue to expand at such phenomenal rates. Base effects — the positive effect of rock-bottom activity in the previous year — will soon fade away. Taxes, unless serious tax reforms are done soon, will continue to be constrained.
Hence, the performance of private construction will remain pivotal to future growth.
Private construction contracted in the second half of 2009 — a delayed response to the Great Recession. As the rest of the economy adjusted to the slower, new normal growth, private construction became the new source of growth.
Its expansion came from two sources; first the continued expansion of the business process outsourcing (BPO) industry and, second, overseas remittances for the low-end to mid-range residential properties.
This came at a time when the private sector was looking for new opportunities. Sadly, there were few alternative investments and slacks in plant capacities preclude expansions. As a result, bank loans to real estate, renting and business services rose exponentially. As of end-March 2012, the combined exposure to the real estate sector of universal and commercial banks and thrift banks reached its highest level yet at P538.1 billion. This was up 21.0% from last year’s P444.9 billion.
Despite the rapid expansion in the real estate market, the World Bank in its recent Philippines Quarterly Update (March 2012) expressed the view that “these markets do not show signs of asset bubbles.”
Nevertheless, the World Bank cautions that despite the generally neutral to positive outlook, the residential segment carries downside risks owing to the following: i) oversupply relative to demand; ii) a potential contraction in remittances owing to continued unrest in the Middle East, reduced deployment in Saudi Arabia, and slower growth in the US and recession in the Euro area, and iii) upward pressure on oil prices, posing risks to private spending growth.
Oil prices are easing, but electricity costs are threatening to surge as a result of rising transmission and generation costs. Transport costs may or may not be reduced, depending on further cuts in oil prices.
But the fragmentary evidence on new residential construction and its value point to a weakening housing market. The number of approved permits for new residential construction has been falling after a weak recovery in the first quarter of 2011. The level of new construction is approximately equal to crisis levels, though the value (uncorrected for inflation) has not changed much either.
The number of approved permits for new residential construction rebounded slightly in the first quarter of 2012. That’s good news.
But a quarter rebound does not establish a trend. Additionally, the value of new construction plummeted 17.4% to P23.3 billion from P28.7 billion recorded during the same quarter of 2011. There appears to be a shift towards more modest housing.
And even the housing market for overseas Filipino workers (OFWs) may not be sustained. Families of overseas Filipino workers are facing tougher times and are adjusting accordingly. As a result of shrinking world economy and growing uncertainty, the growth of OFW remittances has slowed to single-digit levels since 2009. From January to April 2012, remittances grew by only 5.3%.
With the continuing appreciation of the peso, the peso value of OFW remittances has shrunk further. With shrinking income and rising uncertainty — not knowing whether existing contracts will be renewed or extended — OFW families have been saving more (spending less).
OFW households are less likely to purchase a house, according to the Second Quarter 2012 central bank survey on consumer expectations. The percentage of OFW households that will use remittances to purchase a house has declined: from a peak of 16.1% in the fourth quarter of 2008, it has gone down to 11.3% in the first quarter of 2012.
In sum, there’s good news and bad news. The good news is that the Philippine real estate market is resilient, though slowing. It does not show signs of asset bubbles. And it is not highly leveraged.
The bad news is that residential housing supply is outpacing demand, hence the risk of oversupply.
The peso value of OFW remittances is shrinking as the peso appreciates in value. And with job insecurity and gloomier global economic outlook, OFW families are saving more or spending less.
Benjamin Diokno is professor of Economics at the School of Economics, University of the Philippines (Diliman). He was formerly secretary of budget and management in the Estrada Cabinet and undersecretary for budget operations in the Aquino 1 administration. –Benjamin E. Diokno, Businessworld
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