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Wednesday, October 22, 2014

What Happens When the Boom Turns to a Bust?

Another sign that the Philippines is in the middle of one of the biggest real estate booms in the past twenty years is that employment in the construction industry as a percentage of total employment is at an all time high.  As of April 2014, the construction sector now employs 6.8% of all employees, surpassing the peak of the previous boom of 6.2% posted in July 1997, right before the bottom fell out of the market.  The current percentage is more than three standard deviations above the sector's long-term historical average of 5.54% (the average from January 1996 to April 2014).  The probability of this occurring is low, as in very low - less than 0.3%.

In previous blog posts, we talked about how the Philippine Real Estate Bubble might have already peaked.  What we haven't dealt with is the aftermath of that boom, when the boom turns to a bust.

For that, we can turn to the US Construction Industry, which, at its peak, employed 5.0% of all US Workers as of May 2006.  This is only slightly above its long term historical average of 4.5% from May 1999 to May 2013.  When the US Real Estate Market collapsed, employment in the construction industry collapsed as well.  Employment in the sector did not only revert to the mean, it went way beyond it, to compensate for the sector's exuberance during the boom.  Today, the sector employs only 3.8% of all US employees.  On an absolute basis, the number of jobs in the sector collapsed as well.  From a peak of 6.7 million employees as of May 2007, the number of jobs dropped by 1.6 million or 24% to just 5.1 million employees as of May 2013.

Will this happen in the Philippines?  We don't know.  But if it does, it will be disastrous for the country as a whole.

If employment in the sector merely reverts to the mean, meaning a drop from 6.8% as of April 2014 to its long-term historical average of 5.54%, this will mean 1.26% or 486 thousand people will lose their jobs.  If employment in the sector drops to the low end of the range (like 5.0%), this will mean a drop of 1.80% or or a loss 696 thousand jobs.

This just covers the construction sector.  It does not take into account how the sector interacts with the rest of the economy.  Given that the real estate sector has been one of the major drivers of economic growth, it will not be surprising to see how massive the aftershocks of the real estate bust will be.  The US has been through it post 2009 and so has the Philippines after 1997, when the Asian Financial Crisis took hold in the country.

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