‘Pockets of concern’ noted

STEEP PRICE INCREASES in the real estate sector are creating “pockets of concern” but overall there is no cause for alarm just yet, a Bangko Sentral ng Pilipinas (BSP) official said.

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“We are not yet seeing any misalignments, but there are some pockets of concern that we need to investigate,” central bank Assistant Governor Cyd N. Tuaño-Amador said in an interview last Friday.

“We are not yet alarmed but we are attentive, even to underappreciated risks.”

The areas that have put the BSP on alert are the office property and the luxury residential segments, as well as the price-to-earnings ratios of listed property developers, since there are signs of “sustained, unidirectional” increases, Ms. Amador said.

However, she added that it was difficult to clearly detect an asset bubble, especially since there are fundamental reasons supporting increased demand for real estate.

The rise of the office property segment could be driven by an uptick in rentals, especially with the rapid expansion of the outsourcing industry, she explained. The robust economy and an influx of expatriates could also be supporting the residential luxury segment.

Price-to-earnings ratios, meanwhile, could be climbing because of a stock market bull run.

“This could just be part of the economic cycle since the country is going through a boom. As long as these are structural reasons, they are acceptable reasons,” Ms. Amador said.

Moreover, the central bank is monitoring indicators of speculative demand for real estate.

“Some of the red flags include purchases and housing loans for second homes — those bought not to be lived in but to be flipped over,” she said.

Ms. Amador gave assurances that the BSP remained watchful so that macroprudential tools “still have their bite.”

Among the measures that have been recently rolled out by monetary authorities are loan-to-value ratios that allow banks to grant loans only up to 80% the value of collateral; concentration limits capping banks’ exposures to specific sectors such as real estate to only 20% of their total loan portfolio; or single borrower’s loan limits that restrict exposures to any one client to only 25% of banks’ capital.

The exercise of prudence, said Ms. Amador, will be balanced with the goal of promoting economic growth. “We are careful not to be overbearing. Central banks tend to be accused of taking out the punch bowl before the party has even started,” she said.

The economy grew by 6.6% last year amid record low policy rates. There are concerns, though, that easy credit conditions could create bad loans and asset bubbles.

The real estate sector was at the epicenter of the 1997 Asian and the 2008 global financial crises as consumers defaulted on housing loans with property prices becoming hyperinflated, dragging down with them other financial instruments such as mortgage-backed securities. –Diane Claire J. Jiao, Senior Reporter, Businessworld

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