Another Look at Construction Gross Value as a % of GDP as of the 1st Half of 2016

Last September 16, 2016, we noted that Construction Gross Value (Construction GV) at 12.48% as of the first half of 2016 was at a 25 year high, eclipsing its peak value of 12.10% as of 1990.  The ratio was well above its historical average of 9.65% of GDP since 1990. As a result, there has been a sizable "overhang" of investment since 2009.

But the historical average of 9.65% is static.  It does not change with the business cycle.  But how would this trend look if it were more dynamic? If it moved in tandem with the business cycle?  How would this overhang look.

One way to build a long-term macroeconomic trend line would be to use the Hodrick-Prescott Filter that "would remove the cyclical component of a time series from raw data." The historical trend line, then, would be more dynamic and move with the business cycle. So, how would the above graph look with a more dynamic trend line? Would it still reveal a massive overhang or underhang?

The answer is: no. Because the trendline changes with the business cycle, the overhang is less pronounced.  Nevertheless, an overhang still exists.

Moreover, massive investment in construction that began since 2009 has eaten away at the cumulative underhang that existed since the mid 2000's but has only gone past equilibrium in 2016.  As of the first half of 2016, there is a cumulative overhang in construction of only 0.39%.

So, which is it? Has there been a massive overinvestment in construction? Only time will tell.

Singapore, Hong Kong, and Thailand Post Flat to Declining Housing Prices, Can the Philippines and Indonesia be Not Far Behind? - 2nd Qtr. 2016

Almost all countries discussed in this blog post, with the exception of Thailand, have been experiencing rapid growth in home prices that have outstripped inflation by a wide margin.  The gap between home prices and their inflation adjusted levels are at the widest ever, particularly in Singapore, Hong Kong, and the Philippines.


Singapore



Singapore's home prices have now been declining for eleven straight quarters, which, according to Bloomberg, is the longest losing streak in five years.  Home prices are still  70.38% above their year-end 2004 levels. Overall prices levels, as measured by inflation have just increased by 29.09% since year end 2004.  In other words, for the past ten years, Singaporean home prices have outpaced inflation by more than 40 percentage points.

Thailand




In Thailand, which has been experiencing political turmoil for some time, home prices have remained essentially flat since the end of 2004. Home Prices ended 2013 with the index at 100.54, just 0.54% higher than the end of 2004, but showing a substantial recovery since the recent low of 74.08 posted in the third quarter of 2009. Since 2013, home prices have rebounded to In the first quarter of 2016, home prices have rebounded to 16.41, or 16.41% higher than its year-end 2004 levels, way below its expected inflation adjusted levels. General Price levels are 33.78% above their year-end 2004 levels. In other words, Thailand Home Prices have lagged inflation by as much as 17.36% since their year-end 2004 levels.

Indonesia




Meanwhile, in Indonesia, home prices have shown no signs of slowing down their upward trajectory.  In fact, prices seem to have gone parabolic, climbing 4.63% in the last quarter of 2013, from a base of 121.49 as of the third quarter of 2013 to 127.11 as of year end 2013.  In the second quarter of 2016, home prices have climbed an additional 16.86% to reach 143.97.  Since the first quarter of 2007, home prices have risen 43.97%, while inflation has raised general prices by 73.17% during the same period. Indonesian Home Prices, like Thailand, have lagged inflation since 2007.

Hong Kong


Hong Kong real estate prices have leaped by 215.30% in a little over 10 years to reach a staggering 315.30 as of the second quarter of 2016 from a base of 100 since year-end 2004. General inflation levels have just climbed 41.39% during this same period.  In other words, Hong Kong home prices have outpaced inflation by an astounding 173.90% during this period, the highest rate of appreciation in the countries covered in this post.


However, it is important to note that Hong Kong Home Prices have also entered into a correction phase, declining by 9.99% from its recent peak of 350.31 as of the third quarter of 2015 to just 315.30 as of the second quarter of 2016.  There is a distinct possibility that Hong Kong Home Prices may have entered a bear market just as it did in the aftermath of the 1997 Asian Financial Crisis. See previous post: How low can Hong Kong Property Prices Go? Some Clues from the Not Too Distant Past

Philippines

For the first time in years, Philippine House Prices seem to be on the decline.  As of the second quarter of 2016, the Philippine House Price Index stood at 218.29 or 1.22% below the peak of 220.99 as of the first quarter of 2016.  However, they still stand at 118.29% above their year-end 2004 levels.  Philippine home prices, with the exception of Hong Kong, have posted the largest 10-year gains among all the countries considered in this blog post.  Like Singapore and Malaysia, Philippine home prices have outstripped inflation by over fifty-six percentage points.  Like Indonesia and Hong Kong, Philippine home prices have so far no signs of slowing down their upward trajectory for the foreseeable future.   The question is, is this momentum sustainable?  Or will the Philippines and Indonesia follow its ASEAN neighbors, Singapore, Malaysia, and Thailand, in exhibiting plateauing or declining house prices?  That remains to be seen.

Construction Gross Value as a Percentage of GDP Is Near a 25 Year High! - Updated as of 2nd Qtr. 2016

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.65% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 2nd Qtr of 2016, Construction GV as a percentage of GDP now stands higher at 12.48% of GDP - an all-time high for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 3.3% above equilibrium, a rise of 3.1% in just six months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Have Philippine Home Prices Already Plateaued?

For the first time in years, Philippine House Prices seem to be on the decline.  As of the second quarter of 2016, the Philippine House Price Index stood at 218.29 or 1.22% below the peak of 220.99 as of the first quarter of 2016.  

Based on BSP's Residential Real Estate Price Index (RREPI), the price declines seem to have taken place in Metro Manila (NCR), which slipped a marginal 0.26% from 116.9 as of the fourth quarter of 2015 to 116.6 in the first quarter of 2016.  Meanwhile, prices outside NCR have shown healthy gains.

Sales volumes, as shown by HLURB's License to Sell statistics, seem to show around a 5% drop for the first half of the year and a 22% drop in sales volumes since hitting a peak in 2012.

Is this a mere blip or pause in the relentless upsurge of the real estate market? Or the beginning of a sectoral decline? Only time will tell.