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Monday, March 30, 2015

Another Sign that the Philippine Real Estate Bubble May Have Already Peaked? - Updated as of 4th Qtr. 2014

In a technical analysis of the price trends of financial securities, volume is a very important technical indicator. If the volume moves with the trend, the volume confirms the trend.  When price and volume diverge, it is often indicative of a shift in the trend. For example, if an uptrending stock price is accompanied by lower and lower volumes, it may indicate that the price trend is weak and that prices may start to decline.

The same holds true for the real estate market.

US Real Estate Market

In the US, sales volumes peaked for US Total Home Sales (New and Existing Home Sales) at 8,4 million homes in 2005, a year before the US Median Sales Price peaked at US$ 225K in 2006.  By 2007, the US Median Sales Price slipped by only 1% to US$ 223K while sales volumes had already dropped an astonishing 30.58% from the peak sales volume in 2005, to 5.8 million in 2007.

From then on, the US Median Sales Prices continued to decline year after year, bottoming out at $170K in 2011, or some 25% below the peak price level.  By then sales volumes had already bottomed out a year earlier in 2010 to 4.5 million homes, or some 46% below peak volumes.

As of 2014, Median Sales Prices and Sales Volumes have begun to diverge, indicating a slowdown in the US Housing market.

Sources:, St. Louis Fed
Median Sales Price is a weighted average of the median sales prices of New Home Sales and Existing Home Sales

The same dynamic played out in both segments of the US Residential Real Estate Market: New Home Sales and Existing Home Sales.

Here is the chart for New Home Sales:

For the past year, US New Home Sales volumes have already flatlined.  

And here is the chart for Existing Home Sales, the much larger market segment.

In 2014, US Existing Home Sales volume have begun to decline, and could be heralding another decline in US Home Prices.

Philippine Real Estate Market

Might the same dynamic be playing out in the Philippine residential real estate market?  One problem bedeviling such an analysis is the dearth of data.

To my knowledge, the Philippines does not have adequate market data.  For instance, there seem to be no published figures for sales volumes for residential homes.  The best approximation of such data is HLURB's statistics for licenses to sell residential homes.  This statistic represents only new homes and only represents licenses to sell for each residential unit and not the actual sales volumes.

Another issue is that there seems to be no price data on residential sales.  The best data is assembled here, which in turn, is assembled from the Philippine Office of Colliers International, a global real estate agency.  These prices, in turn, are based on the average prices of a prime 3 bedroom condominium unit in the heart of the Makati Central Business District.  This is like basing nationwide US housing prices on the price of a prime 3 bedroom coop unit in Manhattan in New York, one of the priciest real estate markets in the US.  The data available in the Philippines is not representative of the true state of the entire national residential real estate market.  At best, it is an approximation of the Philippine Real Estate Market.  The BSP has stepped into the picture to overcome this deficiency by developing their own real estate index, which would be more comprehensive in scope. Here is a possible candidate for such an index.

But based on the data available, we arrived at this chart:

Based on this data, volumes (as indicated by Residential HLURB licenses to sell) may have already peaked in 2012, while prices have continued their upward climb to date.  Volume seems to have peaked at 264,237 units in 2012 and dropped 15% to 225,051 units in 2013.  In 2014, volumes declined further to just 212,081 units or 20% below peak volumes. In other words, sales volumes have been declining for two solid years in a row.

Prices though, have continued to climb since 2012, another 14% in 2013 and another 7% in 2014, representing a 22% increase over 2012 prices.

Is the same dynamic that played out in the US Residential Real Estate Market playing out in the Philippines?  It looks like it now that the downward trend in sales volumes has continued for two solid years in a row, but it may still be too early to tell.

Monday, March 23, 2015

The Divergence: A Tale of Two Countries

They started on the same path, really.  Two young and very poor countries in Southeast Asia that had just shrugged off hundreds of years of colonial rule.

The first country was at a distinct disadvantage. It was a tiny country - a city-state that was only a third the size of the second country's largest city.  It had no natural resources, not even the most basic resource to sustain life: water.  It's very survival was always under constant threat from its two next door neighbors, one of which was its former master.

The second country had a larger land mass, a larger population, and strong political, economic, and even cultural ties to the most powerful nation on earth, which had two large military bases that served to protect the young country from a dominant and belligerent country to its north.

Both countries were strategically located at the historical nexus of trade and commerce in the Far East.

Both were ruled by two ruthless dictators who assumed power at the same time and who wasted no time consolidating their power under One Party Rule (in essence, one-man rule).  Both leaders were hell-bent on ruling their respective nations for life.  Both rulers groomed their offspring to assume power after their regimes. Both were brilliant, geniuses even.  The ruler of the first nation was a governance genius who gave up his life to enrich his country.  The ruler of the second nation was a criminal genius who enriched his family at the expense of the nation.  And that made all the difference.

The two rulers of the two countries?  As you should have guessed by now, the first ruler was Lee Kuan Yew of Singapore.  The second? Why our very own Ferdinand Marcos of the Philippines!

Yesterday, Lee Kuan Yew died, leaving his country as a first world nation, a model of governance throughout the world that routinely tops the governance indexes in terms of transparency and effficiency.  Its political leadership and civil servants among the world's highest paid and least corruptible in the world.  Lee Kuan Yew's son, Prime Minister Lee Hsien Loong, has continued to guide the country in the same benevolent manner of his father, continuing Singapore's transformation into the economic superpower that it is today.

Lee Kuan Yew left this earth with a reputation as a political giant, the "Wise Man of the East."

As for Marcos?  Marcos left his country in disgrace, booted out by his own countrymen in the 1986 "People Power Revolution." Because of his rampant looting of the economy, he left the nation as poor and even more in debt than when he first took over.  He thoroughly earned the moniker "Ten Most Corrupt Leaders of the World." Marcos so thoroughly institutionalized corruption that the nation consistently ranked at the bottom half of many governance indicators even decades after his death.

In 1993, Singapore, with a population one twentieth of the Philippines, surpassed the Philippine economy in absolute size and has remained there ever since.


It is only very recently that the Philippines has shrugged off its reputation as the "Sick Man of Asia" and has powered ahead of other nations to become the second fastest growing economy in the world.

Singapore and the Philippines started on the same path at the same time and were led by similarly autocratic leaders.  But those paths diverged over time.  The first leader took the route to economic success and glory, the second leader took the route to infamy.  How we wish it had been the other way around.

Monday, March 16, 2015

Does China Even Have a Business Cycle - Construction Wise?

Does China even have a business cycle - construction wise?

This is a picture of China's business cycle from Business Insider.

On the face of it, this looks like a normal, ordinary business cycle with its ups and downs, booms and busts.

Business cyles invariably cause significant fluctuations in investment.  Factories shut down as sales dry up and revamp up production once sales pick up.  This is true for just about anything: Factories, Mines, Housing, and Buildings.  Not so in China.  The pace of China's Investment has been relentlessly trending upward, business cycle or not.

But from an investment perspective, China has been on an investment tear for almost for over fifty years straight.  Gross Capital Formation (GCF) as a percentage of GDP has been on a relentless climb upward since 1962 and is still trending upward.  At 49% of its GDP in 2013, China's GCF is 2.2 times the World Average of 22% as of 2013. It's historical long-term average GCF as % GDP is an astonishing 36.20% - almost 50 percent more than the long-term historical World average of 24.43%.  

This is a pace that no other major national economy has been able to duplicate on a sustained on a long-term basis, not even the largest and fastest growing economies called the BRICs (Brazil, Russia, India, and China).  At 49% of GDP, China's GCF currently stands at almost double that of the historical average of the fast growing BRICs (inclusive of China): 26%

This is not just true of China's Invesmtnent Cycle, it is also true of its Construction and Real Estate Sectors (CRES)  At 12.75% of the economy, the CRES is 37% higher than its historical long term average of 9.25%. It has stayed that way for a long time since the early 1990s, contributing to a substantial over investment.

An extended period of over investment invariably leads to an extended period of mal-investment and misallocation of investment resources to enterprises and ventures of dubious economic value that may eventually go bust.

Sources:; China National Statistical Yearbook

Monday, March 9, 2015

Do Philippine House Prices Have More Room to Run?

Philippine House Prices continued their relentless climb in the 4th quarter of 2014, climbing 1.03% over the third quarter. To date, prices have risen over 110.23% since the fourth quarter of 2004, outpacing inflation which has caused prices to climb by a corresponding 58.21% for the same period.

Given this substantial increase, do Philippine House Prices still have more room to run?

On the face of it, the answer is yes.  Why? Because House Price Cost per Sq. M. amounts to just US$ 3,084, well below the Asian average of US$ 8,257.  Out of 10 countries listed in the Global Property Guide, Philippine House Prices rank the third lowest in the region, just ahead of Cambodia (US$ 2,913) and just behind Thailand (US$ 3,952).

According to Global Property Guide, these prices are for residential properties in the center of the most important city of each country - either the administrative or financial capital of each country.

Source: Global Property Guide

But these prices ignore affordability.  Different countries have different income levels.  Therefore, countries that have a higher income on a per capita basis can afford pricier properties.

Unfortunately, there is a dearth of data when it comes to a city by city income statistics.  The closest and most widely available data is GDP per capita, the latest of which is for the year 2013.


Based on this data, the Philippines has the third lowest GDP per capita for 2013: US$ 2,765, ahead of India (US$ 1,499) but below Indonesia (US$ 3,475).  Naturally, both Singapore and Hong Kong boast of the highest incomes and therefore have the highest property prices.

Using GDP per capita as a proxy for income, on a house price to income ratio, the Philippines does not look so reasonably priced.  After India (764 times income) and Cambodia (289 times income), the Philippines house price to income ratio comes in at 112 times income.  This is higher even that bubblelicious China, which comes in at 102 times income.  The Philippine House Price to Income Ratio is double the regional average of 50 times income.

Country Housing Cost Per Sq. M. in Prime CBD (in USD $) Cost of 100 Sq. M. Residential Condo in CBD (in USD $) 2013 GDP Per Capita (Current USD $) Residential Price/GDP Per Capita (in USD $)
Cambodia 2,913 291,300 1,007 289
China 6,932 693,200 6,807 102
Hong Kong 22,814 2,281,400 38,124 60
India 11,455 1,145,500 1,499 764
Indonesia 2,766 276,600 3,475 80
Japan 10,784 1,078,400 38,634 28
Malaysia 2,616 261,600 10,538 25
Philippines 3,084 308,400 2,765 112
Singapore 15,251 1,525,100 55,183 28
Thailand 3,952 395,200 5,779 68
Average 8,257 825,670 16,381 50

Source: Global Property Guide

According to the Global Property Guide, Low Middle Income and Low Income countries like India and Cambodia generally have higher price to income ratios.

On a global basis, the Philippines has the third highest House Price to Income Ratio, behind India (764 times income), Cambodia (289 times income), Gambia (137 times income). It is tied with Madagascar (112 times income) and just ahead of Russia (108 times income).  Among the Lower Middle Income countries, the Philippines ranks second behind India and just ahead of Indonesia (80 times income).

Country Housing Cost Per Sq. M. in Prime CBD (in USD $) Cost of 100 Sq. M. Residential Condo in CBD (in USD $) 2013 GDP Per Capita (Current USD $) Residential Price/GDP Per Capita (in USD $) Income Class
Russia 15,772 1,577,187 14,612 108 High Income
United Kingdom 33,993 3,399,339 41,788 81 High Income
Hong Kong 22,814 2,281,400 38,124 60 High Income
France 18,128 1,812,848 42,503 43 High Income
USA 18,499 1,849,900 53,042 35 High Income
Japan 10,784 1,078,400 38,634 28 High Income
Singapore 15,251 1,525,100 55,183 28 High Income
Israel 9,511 951,100 36,051 26 High Income
Antigua 3,501 350,100 13,342 26 High Income
St. Kitts and Nevis 3,496 349,600 14,133 25 High Income
Italy 7,882 788,195 35,926 22 High Income
Switzerland 15,028 1,502,754 84,815 18 High Income
Chile 2,749 274,900 15,732 17 High Income
Finland 8,259 825,943 49,147 17 High Income
Bahamas 3,632 363,200 22,312 16 High Income
Canada 8,288 828,800 51,958 16 High Income
Uruguay 2,562 256,200 16,351 16 High Income
Sweden 9,292 929,219 60,430 15 High Income
Spain 4,575 457,499 29,863 15 High Income
New Zealand 5,611 561,100 41,556 14 High Income
Netherlands 6,522 652,221 50,793 13 High Income
Trinidad & Tobago 2,334 233,400 18,373 13 High Income
Germany 5,420 542,033 46,269 12 High Income
United Arab Emirates 5,037 503,700 43,049 12 High Income
Australia 7,626 762,600 67,458 11 High Income
Ireland 5,524 552,401 50,503 11 High Income
Denmark 5,711 571,142 59,832 10 High Income
Puerto Rico 1,365 136,500 28,529 5 High Income
China 6,932 693,200 6,807 102 Upper Middle Income
Thailand 3,952 395,200 5,779 68 Upper Middle Income
South Africa 4,101 410,100 6,618 62 Upper Middle Income
Belize 2,322 232,200 4,894 47 Upper Middle Income
Lebanon 3,693 369,300 9,928 37 Upper Middle Income
Dominican Republic 2,078 207,800 5,879 35 Upper Middle Income
Brazil 3,751 375,100 11,208 33 Upper Middle Income
Colombia 2,379 237,900 7,831 30 Upper Middle Income
Peru 1,810 181,000 6,662 27 Upper Middle Income
Jamaica 1,404 140,400 5,290 27 Upper Middle Income
Mexico 2,635 263,500 10,307 26 Upper Middle Income
St. Lucia 1,860 186,000 7,328 25 Upper Middle Income
Malaysia 2,616 261,600 10,538 25 Upper Middle Income
Jordan 1,282 128,200 5,214 25 Upper Middle Income
Ecuador 1,278 127,800 6,003 21 Upper Middle Income
Argentina 2,813 281,300 14,715 19 Upper Middle Income
Panama 2,001 200,100 11,037 18 Upper Middle Income
Costa Rica 1,642 164,200 10,185 16 Upper Middle Income
India 11,455 1,145,500 1,499 764 Lower Middle Income
Philippines 3,084 308,400 2,765 112 Lower Middle Income
Indonesia 2,766 276,600 3,475 80 Lower Middle Income
Nicaragua 1,342 134,200 1,851 72 Lower Middle Income
Morocco 2,015 201,500 3,093 65 Lower Middle Income
Cape Verde 1,300 130,000 3,767 35 Lower Middle Income
El Salvador 1,193 119,300 3,826 31 Lower Middle Income
Egypt 831 83,100 3,315 25 Lower Middle Income
Cambodia 2,913 291,300 1,007 289 Low Income
Gambia 667 66,700 489 137 Low Income
Madagascar 520 52,000 463 112 Low Income
Tanzania 700 70,000 695 101 Low Income
Kenya 900 90,000 1,246 72 Low Income


So do Philippine Housing Prices still have more room to run?  Maybe so.  But the odds looked stacked against it.