How Crazy is the Philippine Real Estate Market? Prices have Climbed Over 63% Since Duterte Took Office!

Philippine house prices have gone parabolic. They have climbed 63.33% since President Duterte took office in the second half of 2016. Year-on-year price increase as of the 4th Qtr 2019 is an astounding 26.28%. Prices have outpaced inflation by a wide margin, 169.37 percentage points.

How long can this go on? Not long, considering sales volumes dropped by more than  25% in 2018, indicating that more and more people cannot afford the high price levels.

In 2018, Even Ayala Land Had a Less Than Stellar Year

Last time we looked at Ayala Land, its Installment Contract Receivables (ICRs) problem had gotten worse and not better.

In 2018, things are looking better - much better. A lot of its ICRs were sold off to affiliates like BPI Family Bank and the overall level of ICRs have gone down substantially.

But credit quality remains a problem.

As a percentage of the remaining ICRs, total past due and impaired ICRs has not changed much.

Ayala Land's Real Estate Receivables Problem Has Gotten Worse, Not Better

The Philippine Real Estate Bubble Has Also Burst For... Ayala Land!

Hong Kong Real Estate Prices Have Budged - But Only A Little - as of 3rd Qtr. 2019

On a monthly basis, Hong Kong Real Estate Prices have started showing some declines. But the declines are minimal. They have not reached correction levels of 10% or more.

But on a year-on-year basis, prices have merely flattened.

Even by class, prices have flattened.

And the most expensive class, Class E (>160 sq. m.), has declined the most but have not reached the magnitudes of past declines.

Hong Kong House Prices Haven't Budged - Yet

How low can Hong Kong Property Prices Go? Some Clues from the Not Too Distant Past.

How Crazy is the Philippine Real Estate Market? Prices have Climbed Almost 50% Since Duterte Took Office!

Philippine house prices have gone parabolic. They have climbed 49.30% since President Duterte took office in the second half of 2016. Year-on-year price increase as of the 3rd Qtr 2019 is an astounding 21.20%. Prices have outpaced inflation by a wide margin, 139.88 percentage points.


How long can this go on? Not long, considering sales volumes dropped by more than  25% in 2018, indicating that more and more people cannot afford the high price levels.

The Not So Obvious Real Estate Bubbles

We all know about the high price of real estate in San Francisco and Los Angeles. Both metro areas boast one of the highest Median Home Price to Median Income ratios in the country. In 2018, the ratio for Los Angeles was an eye-watering 9.44 times median income. San Francisco was not too far behind with a ratio of 9.24 times median income. The sheer unaffordability of many homes has spawned a crisis of homelessness in those cities. Even tech workers, whose high wages have pushed up real estate prices in Silicon Valley, are forced to sleep in their cars and vans.

Yet those real estate markets are not technically in a bubble, and their ratios are just a shade over one standard deviation of their historical house price to income ratios. For instance, LA's historical ratio for the past 29 years has been at a lofty 7.11 times income, not too far from the current 9.44 times income. The same holds true for San Francisco. Its historical average is 7.57 versus the current 9.24 times income.

Even the global cities of Miami and New York are well within their historical averages. Miami's affordability ratio for 2018 was 6.06 times income - not far from its historical average of 4.71. New York's affordability ratio for 2018 was 5.25 times income - a shade below its historical average of 5.26 times income.

Median House Price to Median Income Ratios
Metropolitan Area	2018	Mean	Std Dev	Z Score
Los Angeles-Long Beach-Anaheim, CA	9.44	7.11	2.14	1.09
San Francisco-Oakland-Hayward, CA	9.24	7.57	1.65	1.01
Miami-Fort Lauderdale-West Palm Beach, FL	6.06	4.71	1.54	0.88
New York-Newark-Jersey City, NY-NJ-PA	5.25	5.26	1.17	-0.01

So where are the bubbilicious markets? Where have home prices strayed very far from their historical affordability ratios? Does Midland, TX come to mind? How about Lubbock, TX? Birmingham, AL? All these places had affordability ratios of less than 4 times income in 2018 - below the US national average of 4.13 times income. But all are solidly in bubble land with affordability ratios more than 2 times their historical averages since 1990.

Midland, TX ratio stood at 3.08 in 2018 - almost three standard deviations away from its historical mean of just 2.33 times income. The probability of the ratio going higher is just 0.17%. Lubbock's ratio of 3.03 times income in 2018 is 2.58 standard deviations away from its historical mean of just 2.59 times income, giving an upside probability of 0.49%. Birmingham, AL's upside is slightly better 0.64% because its 2018 affordability ratio of 3.86 times income is 2.49 standard deviations away from its historical mean of 3.34 times income.

 According to data tabulated by Harvard University's Joint Center for Housing Studies, 37 metro areas out of 382 metros are in bubble markets:

None of them, with the exception of San Jose, CA of Silicon Valley, are in obvious real estate bubbles.

Will their affordability ratios normalize or have they reached a permanently higher plateau? Only time will tell. But if they do, the results can be just as catastrophic for the homeowners.

Only three metro areas out of 382 are in a depression. Their affordability ratios in 2018 were way below their historical mean:

1. Cape Girardeau, MO
2. Beckley, WV
3. Decatur, IL

The upside probabilities for these areas? More than 98%.


Source: State of the Nation's Housing, Joint Center for Housing Studies, Harvard University

US Home Prices Have Softened Somewhat. How Much Lower Should They Go?

Prices of new homes sold in the US have softened somewhat.

As of August 2019, the average prices of new homes sold in the US have dropped 2.2%, from $323,125 in 2018 to just $316,075 today. Incomes have also risen. We estimate the median household income to be $65,074 in 2019, up 3.0% from $63,179 in 2018 and up 6.44% from $61,136 in 2019. As a result, the house price to income ratio now stands at an affordable 4.86 times income, down from its recent peak of 5.26 times income in 2017.

But house prices are still a long way from affordable. The current house price to income ratio is more than one standard deviation above the long-term mean of 4.23. The same holds true for existing homes and all homes both new and existing.


 

Home Type	2019 Median Sales Price	2019 Median Household Income (Estimated)	2019 House Price to Income Ratio (HPI)	Mean House Price to Income Ratio (Mean HPI)
New Homes	$316,075	$65,074	4.86	4.23
Existing Homes	$268,513	$65,074	4.13	3.73
New and Existing Homes (Weighted Average)	$273,859	$65,074	4.21	3.81

So how much further do home prices have to fall to become affordable at current incomes? About 9.4% for all homes, from the current price of $273,859 to $248,160. The drop in new home prices will have to be even steeper: almost 13%.

Conversely, if home prices remain flat, how much further do incomes have to rise to reach their long-term affordability? For all homes, this is around 10.4%. To afford a new home, incomes have to rise 14.9%.

If incomes rise by the current rate of 3.0% a year, it will take 3-5 years before home prices hit their long-term affordability ratios. If prices continue to drop at the current rate of just 2.0% a year, it will take much longer: 5-7 years.

We could be in for a long wait.

While Philippine House Prices Rose Sharply in 2018, Sales Volumes Fell. Is this the Start of the Real Estate Crash?

In a classic technical analysis indicator, Philippine Home Prices rose by 15.40% in 2018 while sales volumes fell by a startling 25.55% over the previous year, indicating that fewer and fewer people could afford the higher prices.

Despite this, House Prices, at least in the Makati CBD, continued to rise even further, by 10.07% as of the second quarter of 2019.

Today, the BSP reported that its Residential Real Estate Price Index (RREPI) fell by 2.08% on a Philippine-wide basis and across all types. Prices in areas outside the National Capital Region (Ex-NCR) fell while real estate prices in the National Capital Region (NCR) stayed about flat.

Although this is only a slowdown and a very marginal one at that, it could lead to a crash as the market clears.

This is Even Nuttier! When's the Crash? Philippine Home Prices Have Gone Even More Parabolic!

This is Even Nuttier! When's the Crash? Philippine Home Prices Have Gone Even More Parabolic!

Philippine Home Prices have gone parabolic. Home prices are now 125.63% above their inflation-adjusted basis.

On a year-over-year basis, home prices have increased almost 20% year-on-year since the second quarter  of 2018. Since the third quarter of 2016, home prices have climbed 43.39%. This pace is unsustainable and will not last.

Hong Kong House Prices Haven't Budged - Yet

But the data is only up to the second quarter of 2019. And the protests only started on a massive scale in the middle of June 2019.


Source: Hong Kong Rating and Valuation Department

This is Nuts. When's the Crash? Philippine Home Prices Have Gone Parabolic!

Philippine Home Prices have gone parabolic. Home prices are now 116.03% above their inflation-adjusted basis.

On a year-over-year basis, home prices have increased almost 19% since the first quarter  of 2018. Since the third quarter of 2016, home prices have climbed 38%. This pace is unsustainable and will not last.

How Far Does the Canadian Housing Market Have to Fall to Reach Equilibrium?

In 2017, the Canadian Housing Market peaked in the second quarter of 2017. Since then, prices have declined modestly, by just 5.28% as of the first quarter of 2019. So, the housing market has slowed down and not quite reached correction levels of a 10% decline.

House prices could still fall by 28.00% to align themselves with the growth in personal disposable incomes. In terms of the ratio of real house prices to real personal disposable incomes, house prices have fallen even more: 7.70% from Q2 of 2017 to Q1 of 2019. The  ratio is now almost within two standard deviations from the historical mean. In other words, they less extremely overvalued and are just starting to enter merely overvalued territory. The probability of house prices being any higher is now only 1.35% instead of 1.30% the last time we looked. The improvement is infinitesimally small.

 If the ratio does revert to the mean, house prices could fall by 31.56%. 


How low can Canadian Property Prices Go?

How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand? 

When Does the Overheated Real Estate Market of Australia Reach Equilibrium?

Last year, the real estate bust hit Australia. Prices have declined 8.27% since they peaked in the last quarter of 2017. But the decline is still a shade below a 10% correction and has not yet reached bear market proportions of a decline of 20% or more.

House prices could still fall by 38.56% to reach their inflation-adjusted levels. In relation to incomes, the ratio of real house prices to real personal disposable incomes have fallen significantly. That ratio is now within two standard deviations from the historical mean. In other words, they are now just overvalued and not extremely overvalued.  The probability of house prices being any higher is now a healthier 5.22% instead of 1.4% the last time we looked.

If the ratio does revert to the mean, house prices could still fall by 30.67% in real terms. 

How low can Australian Property Prices Go? Let Me Count the Ways  

How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand?  

What's Powering Philippine GDP Growth? Construction is at a 20 Year High

Construction, both Public and Private, is definitely firing on all cylinders. For the entire 2018, Construction Gross Value as a Percentage of GDP reached 13.47% - the highest it's ever been since 1990, some 28 years ago.

Cumulative Construction Overhang, which measures how far Construction GV is above its historical trend, is now at 6.52% of GDP, more than what it was from 1990 to 2000, the previous boom years.

Private Construction as a Percentage of GDP is at an acute high - 9.62%. The cumulative overhang is even more acute - 5.31% in 2018.

Public Construction is only beginning to break out of its doldrums. Public Construction GV reached 3.85% of GDP, just slightly above the previous high of 3.81% in 1998 - in the height of the Asian Financial Crisis.

As a result, the Cumulative Overhang in Public Construction is much much more muted, only 0.55% of GDP, still way below the ratio from 1998 to 2002.

Public Construction, namely infrastructure, has room to grow. Public infrastructure begets private infrastructure,  and power Private Construction to new highs.

Philippine Public Construction as a % of GDP is at a 20 Year High! - As of September 30, 2018

Philippine House Prices are Still Accelerating! - As of December 31, 2018

Despite the gloomy global macroeconomic environment for emerging markets, Philippine House Prices continued to accelerate in the fourth quarter of 2018. The Philippine House Price Index (culled from data from Colliers International Philippines on Luxury 3BR Condominiums in the Makati CBD), accelerated by 5.00% alone in the fourth quarter of 2018. This is the fastest quarter-on-quarter growth since the second quarter of 2013, when prices rose by 6.92% over the previous quarter. The index now stands at 278.21, almost three times more than its base of 100.00 since the fourth quarter of 2004. The index is also 97 percentage points higher than its inflation adjusted basis.

Source: Colliers International Philippines

How low can Canadian Property Prices Go?

Eight months ago, we speculated that the Canadian Property Market was due for a bust. Today, that reality has come ever closer. So far, as of the third quarter of 2018, property prices have declined by 4.24% since they peaked in the second quarter of 2017.

Property Prices have also leapfrogged incomes so much that the relationship of Property Prices to Income is way out of whack. On average, the ratio of Real House Prices to Real Personal Disposable Income (data from the International House Price Database maintained by the Dallas Federal Reserve) since 1975 has been 95% of Real Personal Disposable Income with a Standard Deviation of 19%. As of the 3rd qtr of 2018, Real House Prices now stand at 142% of Real Personal Disposable Income. This represents more than 2 Standard Deviations above the historical mean. Assuming a normal distribution, there is only a 1.3% probability that the property market could go even higher. If Real House Prices revert to the mean, as they often do, Canada could be in for a property decline of 33.58% from current levels. But markets always tend to overshoot to the downside. If the real estate boom of the past two decades caused prices to surge way past anything that reflect fundamentals, a panic could set in on the downside and cause prices to drop to levels not seen in a generation.

How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand?

How low can Australian Property Prices Go? Let Me Count the Ways

Almost three years ago, we speculated that the Australian Property Market was due for a bust. Today, that reality has come ever closer. So far, property prices have declined for all three quarters of 2018, peaking in the fourth quarter of 2017. But the decline is marginal - only a shade less than 3% (2.86% to be exact) and may represent a slowdown than an actual property bust.

Australian Property Prices are still way above their their inflation adjusted basis since year-end 2002. If property prices were to drop to their inflation adjusted levels, they would drop by an astounding 42.29%!.

Property Prices have also leapfrogged incomes so much that the relationship of Property Prices to Income is way out of whack. On average, the ratio of Real House Prices to Real Personal Disposable Income (data from the International House Price Database maintained by the Dallas Federal Reserve) since 1975 has been 80% of Real Personal Disposable Income with a Standard Deviation of 21.91%. As of the 2nd qtr of 2018, Real House Prices now stand at 128.48% of Real Personal Disposable Income. This represents more than 2 Standard Deviations above the historical mean. Assuming a normal distribution, there is only a 1.4% probability that the property market could go even higher. If Real House Prices revert to the mean, as they often do, Australia could be in for a property decline of 37.39% from current levels.

Both calculations, inflation-adjusted basis or by income-adjusted basis, predict a severe decline (more than 30%). But markets always tend to overshoot to the downside. If the real estate boom of the past two decades caused prices to surge way past anything that reflect fundamentals, a panic could set in on the downside and cause prices to drop to levels not seen in a generation.

How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand?

Philippine Public Construction as a % of GDP is at a 20 Year High! - As of September 30, 2018

Philippine Public Construction is way above its historical trend of 3.40% of GDP. As of the third quarter of 2018, Philippine Public Construction Gross Value as a percentage of GDP hit 4.15%. This is the highest ratio since 1998.

This boost in public construction, particularly in infrastructure, has led to the first cumulative overhang since 2003. 

As long as infrastructure spending is not done in white elephants, such as China's famous bridges to nowhere, this bodes well for the Philippine economy because the fiscal multiplier from such projects is very significant and will increase efficiencies in the entire Philippine economy.

Construction Gross Value as a Percentage of GDP Is Near All Time Highs! - Updated as of 2nd Qtr 2018

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 9.59% 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 2018, Construction GV as a percentage of GDP now stands higher at 13.58% of GDP - up from an all-time high of 12.61% posted in 2016. But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 6.8% above equilibrium.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Private construction as a percentage of GDP seems to have leveled off from its all time high. As of 2018 Q2, this ratio now stands at 8.97% of GDP, down from a high of 9.23% of GDP as of 2016.

The overhang in private construction continues to climb. It's now 5.16% of GDP as of the 1st Half of 2018.

So what's driving the overall upward momentum? Two words: Public Construction. Public construction gross value jumped substantially in the 1st half of 2018. It's now 4.61% of GDP, way above any level it has seen in the last 20 years.

Based on the graph of the cumulative overhang in public construction gross value, the Philippines seems to have been substantially underinvesting in public infrastructure from 2010 to 2017. The overhang now stands at 0.90% of GDP - levels not seen since the 1990's.

This bodes well for the country because a massive uptick in public construction usually involves public infrastructure, whose multiplier effect is substantially more than private construction. For example, a bridge or road benefits the general population, while a residential building or mall usually just benefits tenants and consumers within the locality.

Moreover, as private construction ticks down, public construction is poised to pick up the slack and maintain the GDP growth of the country.

Construction Gross Value as a Percentage of GDP Is Near All Time Highs! - Updated as of 1st Qtr 2018

According to the BSP, Philippine Real Estate Prices in 2018 Q1 Posted Gains but Single Detached Homes Declined

According to the BSP's Residential Real Estate Price Index (RREPI), residential real estate prices for the entire Philippines (All Types) increased by 2.11% year-on-year (yoy). Most of the increase took place in the NCR region, which increased by 2.70% yoy in 2018 Q1.  Ex-NCR increased by just 0.90% yoy for the same period.

The prices for Single Detached Homes in the NCR declined by a substantial 5.33% year over year, from 91.9 as of the first quarter 2017 to 87.0 as of the first quarter of 2018. Ex-NCR prices for Single Detached Homes decllined by -0.37% for same time period. On an overall basis, prices for Single Detached Homes declined by -0.56% year over year.

Duplex prices increased very substantially. NCR prices increased by 465.77% for the year leading up to the first quarter of 2018. For Ex-NCR, the increase in duplex prices was much more muted, only 4.16% year on year for the same period. Overall, Philippine duplex prices rose by 44.19% year on year, from 91.2 in 2017 Q1 to 131.5 as of 2018 Q2.

Townhouse prices also increased substantially year on year. NCR townhouses increased in price by 9.06% for the year. Ex-NCR townhouses increased by 15.64% for the same period. Overall, Philippine townhouse prices increased by 7.26% year on year to reach 122.4 in 2018 Q1, up from 107.7 in 2017 Q1.

Condominiums were another bright spot in the residential real estate sector. Throughout the Philippines, prices gained 2.03% year-over-year. The gains were primarily due to NCR condominiums, which rose 3.31% year-over-year. Ex-NCR condominium prices declined by -3.13% in one year.

How reliable are these trends? BSP's Residential Real Estate Price Index (RREPI) is relatively new, having begun only in the second quarter of 2015. So, it's a little over two years old and the results have been volatile. The kinks in the statistics will, hopefully, over time, be worked out.
Read: The Unbearable Volatility of BSP's Residential Real Estate Price Index

Are ASEAN House Prices Accelerating? The Blow Off Top Continues as of Q2 2018

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 which have been declining for fourteen straight quarters, have resumed their upward trend. Home prices have rebounded by 9.00% off the low of 168.02 as of the second quarter of 2018. However, home prices are still  83.27% above their year-end 2004 levels. Overall prices levels, as measured by inflation have just increased by 29.87% since year end 2004.  In other words, for the past ten years, Singaporean home prices have outpaced inflation by more than 50 percentage points.

 Malaysia


Neighboring Malaysia's House Price Index now stands at 271.12 as of the first quarter 2018, 171.12% higher than year-end 1998 levels.  General price levels as of the fourth quarter 2017 are only around 55.59% higher than their year-end 1998 levels.

  

 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. In the second quarter of 2018, home prices have rebounded to 122.70, or 22.70% higher than its year-end 2004 levels, way below its expected inflation adjusted levels. General Price levels are 35.65% above their year-end 2004 levels. In other words, Thailand Home Prices have lagged inflation by as much as 12.95% since their year-end 2004 levels.

Indonesia

 
Meanwhile in Indonesia, home prices have showed 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 first quarter of 2018, home prices have climbed an additional 25.47% to reach 152.58.  Since the first quarter of 2007, home prices have risen 52.58%, while inflation has raised general prices by 84.21% during the same period. Indonesian Home Prices, like Thailand, have lagged inflation since 2007.

Hong Kong

Hong Kong real estate prices have reached a staggering 465.25 as of the second quarter of 2018 from a base of 100 since year-end 2004. General inflation levels have just climbed 46.79% during this same period.  In other words, Hong Kong home prices have outpaced inflation by an astounding 318.46% 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 minor correction phase, declining by 9.83% from its recent peak of 365.95 as of the third quarter of 2015 to just 329.38 as of the first quarter of 2016.  Although there was a distinct possibility that Hong Kong Home Prices entered a bear market just as it did in the aftermath of the 1997 Asian Financial Crisis, that possibility has now disappeared and the index is at an all-time high. See previous post: How low can Hong Kong Property Prices Go? Some Clues from the Not Too Distant Past

Philippines

Philippine house price index stands at 255.26 at the end of the second quarter 2018 or over 155.26% 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 around seventy-eight 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.

 Source: Colliers International Philippines