Effects of the financial crisis on the private real estate sector in Metro Manila
Date
1999-03
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Abstract
The so-called "collapse" of the real estate sector brought about by the regional currency crisis and the resulting increase of interest rates by the Bangko Sentral ng Pilipinas in an effort to defend the peso from speculative attacks raised concerns on how liberal banking policies should persist. Making matters worse for the real estate sector were concerns over peaking property prices, banks lending too much to the property sector and the number of real estate companies facing difficulties in repaying their loans. This paper will give us some insights on how to avoid a collapse in the real estate sector, which resulted in a rise in unemployment followed by a decreased in GDP growth, when such a crisis with this magnitude occurs in the future. In addition, this paper will recommend some policy implications on how to lower current high interest rates in order for the economy to start picking up. The problem that the real estate experienced was its overexposure to dollar- denominated loans due to lower interest rates abroad, with hopes that the Philippine exchange rate would remain strong. In addition, banks were lending too much to the real estate sector which is not highly productive and is not a dollar earning industry because it mostly caters to local buyers. But it is obvious that our currency did not stay strong due to weakness in other industries such as the manufacturing sector. Weak exports and a surplus of imports due to the strong peso further aggravated the situation. Meanwhile, short-term investments by foreign investors did not make anything better. The easy movement of capital from one country to another caused the currency crisis to become over-exaggerated. When the currency crunch set in, the real estate sector found itself helpless with large dollar- denominated loans needed to be paid. This led to an increase in the number of loan defaults by real estate companies in the banking and financial sector. The number of loan defaults then led to a rise in the already high interest rates from the currency turmoil that was used to ward off speculators, and lack of liquidity which contracted real estate growth. The contraction of growth in the real estate sector can be seen in the number of projects that were temporarily halted, if not indefinitely. This crisis is indeed a painful learning experience for this particular industry and for the governing policy makers as well. Investing in real estate with low productivity while neglecting the other highly productive sectors of the economy may be detrimental. The banking sector must therefore commit itself to structural reforms such as monitoring and regulating capital inflows and outflows without driving out foreign investors. Banks must also lessen their loans to industries that have low productive yields like real estate and be more cautious when lending out funds in order to decrease the number of non-performing loans. The slow down in production of the real estate sector in the Philippines was due to the so-called "currency crisis" that started in Thailand and eventually spread across the region. Due to the weakening of the peso from P26: $1 to around P40: $1, the Central Bank had to ward off speculators by raising interest rates. Since real estate depends on the interest rate for their loans, a high interest rate would mean a contraction in the real estate sector. But these private real estate firms' borrowings were mostly dollar- denominated. Thus, increasing their liabilities and further worsening their status. Since the real estate sector is a highly capital intensive industry, the companies would benefit when interest rates are low, making cost of capital cheaper. The financial crisis and the depreciation of the peso bid up interest rates to extremely high levels. This rapid increase in interest rates hurt the growth of the real estate sector. Therefore, the growth of the private real-estate sector in the Philippines, measured by the growth of the real estate index in the Philippines Stock Exchange from 1994 to 1998 (quarterly) and the companies net incomes from 1994 to 1998 (quarterly), is dependent on interest rates, foreign exchange (due to dollar-denominated loans), and price of construction materials. We suspect that interest rates and foreign exchange to be inversely related to the growth of the real estate sector and price of construction materials directly proportional to growth in the private real estate sector in the Philippines. The data of the paper will be taken from different reading materials with statistical figures gathered from National Economic Development Authority, University of Asia and the Pacific, Asian Development Bank, Central Bank, Department of Finance, University of the Philippines SE, Colliers Jardine, Abacus Securities Corporation, Jardine Fleming Securities and Cuervo Far East. Regression analysis using the t test will be used in analyzing the data gathered.
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Keywords
Real estate, Financial crisis