Singapore, Malaysia, and Thailand Post Flat to Declining Housing Prices, Can the Philippines and Indonesia be Not Far Behind? - 1st Qtr 2015

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 six straight quarters, which, according to Bloomberg, is the longest losing streak in five years.  Home prices are still  77.08% above their year end 2004 levels. Overall prices levels, as measured by inflation have just increased by 30.22% since year end 2004.  In other words, for the past ten years, Singaporean home prices have outpaced inflation by almost 50 percentage points.

Malaysia



Neighboring Malaysia's House Price Index actually topped out at 181.64 in the second quarter of 2014 and has declined to 178.84 as of the first quarter of 2015.  Home prices are 78.84% above their year end 2004 levels.  General price levels are around 50 percentage points lower, at 30.37% above their year end 2004 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 first quarter of 2015, home prices have rebounded to 106.32, or 6.32% higher than its year-end 2004 levels, way below its expected inflation adjusted levels. General Price levels are 34.88% above 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 2015, home prices have climbed an additional 9.00% to reach 138.57.  Since the first quarter of 2007, home prices have risen 38.54%. Indonesian Home Prices, like Thailand, have lagged inflation since 2007.

Hong Kong

Hong Kong real estate prices have leaped by 234.46% in a little over 10 years to reach a staggering 334.46 as of the first quarter of 2015 from a base of 100 since year-end 2004. General inflation levels have just climbed 36.85% during this same period.  In other words, Hong Kong home prices have outpaced inflation by an astounding 197.61% during this period, the highest rate of appreciation in the countries covered in this post.

Philippines

Philippine house price index stands at 214.79% at the end of the first quarter 2015 or over 114.79% 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 fifty-five 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: Global Property Guide, Trading Economics

Great Depression vs. Great Recession: Unemployment - Updated April 2015

The reported unemployment rate during the Great Depression was significantly higher than the reported unemployment rates of the Great Recession. 

But are the two rates comparable? Before 1938, children were a significant part of the labor force.  In 1900, children younger than sixteen made up as much as eighteen percent of the labor force.  It was only when the Fair Labor Standards Act of 1938 became law that children younger than sixteen were barred from working in manufacturing and mining but not agriculture.

To make the numbers more comparable, it is better to get the ratio of Employment to the Total Population (which includes children). When we do this, the two measures are not so far apart.  In 1929, the year "0" for the Great Depression, 54.41% of the total population was employed.  By 1933, year "4", only 41.97% of the population was employed. But the rise in employment was dramatic.  Four years later, 47.63% of the population was employed, almost six percentage points higher. The employment momentum only stalled when the tax hikes of 1937 induced another recession in 1938 and new child labor laws barred children from the labor force.  If the momentum had continued, the employment ratio would have recovered in less than five years.


In 2007, the year "0" of the Great Recession, 48.42% of the population was employed.   Four years later, only 44.89% of the population was employed, a drop of less than 4 percentage points.  By April 2015, a little over three years later, only 46.27% of the population is employed, an increase of only 1.38% percentage points.  The growth rate of employment was less than a fourth that of the Great Depression.  At this rate, it will take six more years before employment recovers to that of Year "0".

"Great Depression vs. Great Recession"

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"

The Philippine Real Estate Bubble Has Already Burst for HOUSE (8990 Holdings, Inc.)

The information has been out for almost two weeks now.  It was disclosed deep in the bowels of the 2014 Annual Report of 8990 Holdings, Inc. (HOUSE).  The real estate bubble has burst ...at least for HOUSE.  There was a marked deterioration in 2014 in 8990 Holdings' Past Due but Not Impaired Installment Contract Receivables both in absolute numbers and relative to its total portfolio of Installment Contract Receivables (ICRs).  An aging analysis buried in the 2014 Annual Report showed that delinquencies jumped by a minimum factor of 10 in all aging categories, whether the unimpaired but past due ICRs were delinquent for: 1) less than 30 days; 2) 31 to 60 days; 3) 61 to 90 days; 4) over 90 days.


A few charts tell the story:

Total Past Due But Not Impaired ICRs now comprise 2.45% of 8990 Holdings Total ICR portfolio as of 2014, an exponential jump from 0.25% in 2013 and 0.77% reported in 2012.

This, by itself, is not worrying.  What is worrying is that 8990 Holdings also reported a gargantuan hockey stick type increase in its Impaired ICRs, both in absolute value and relative to total ICRs.

So now we can see that both Past Due But Not Impaired ICRs as well as Impaired ICRs collectively comprise 12.29% of 8990 Holdings Total ICR portfolio of Php 14.113 billion as of December 31, 2014.

But what does this all mean?

Under 8990 Holdings' business model, the company functions like an in-house bank or mortgage lender, providing a substantial amount of financing to its customers so that these customers in turn can buy their homes.  This model is great... when it works.  For undertaking the risk of financing its customers, the company earns interest income from its customers over and above the gross profits it earns from the sale of a property.  Under this model, the company owns the title to the properties it sells until the property is fully paid off, obviating the need for an expensive and protracted foreclosure process when a customer defaults.

Unlike a bank, 8990 Holdings has a higher cost of funds because not only does it borrow money from banks to finance the development of its properties, it also borrows money from banks to finance its loans to its customers, often by assigning its ICRs to a bank in exchange for ready cash.  A bank has a much cheaper source of funding: its depositors who these days, are paid almost nothing for keeping their money in the bank.  In order to earn a profit on its financing operations, the home financing provided by 8990 Holdings tends to be much more expensive than the home loans provided by banks. Also, the customers of 8990 Holdings tend to me much more marginal and less credit-worthy than bank customers.  After all, why would anyone go to 8990 Holdings if they can get a much cheaper loan from a bank?

Has the company been too aggressive in its focus on sales to the point of sacrificing credit quality? Perhaps.  Have home prices gone up so much past the point of affordability?  Maybe.  Have the company's customers been hit with an economic shock in the past year?  If they have, it is not obvious because the nation's GDP grew at a decent 5.30% clip in 2014. But according to the Philippines Housing Land Use Regulatory Board (HLURB), there was a 16% drop in HLURB's Licenses to Sell in 2014 in the Socialized Housing space, 8990's market niche.

With 12.29% of its customers not paying off their properties on a timely basis means that as a bank, 8990 Holdings would rank as the 19th worst bank in the country in terms of Gross NPLs/Gross Total Loan Portfolio. 

Around 80% of these past due borrowers are in severe default, hence the impaired status.  In other words, these borrowers are in the process of being evicted from their homes and their homes repossessed by the company.

The company has already made provisions of Php 130.857 million for impairment losses and has recognized a loss of Php 56.972 million on property repossessions.  Expect more to come as the "pig" of impaired ICRs" winds through the "python" of the company's eviction and repossession process.

See Previous Blog Posts:

Has the Philippine Real Estate Bubble Already Burst?

8990 Holdings, Inc.: The Case of the Disappearing Past Due Installment Contract Receivables

Singapore, Malaysia, and Thailand Post Flat to Declining Housing Prices, Can the Philippines and Indonesia be Not Far Behind? - 4th Qtr 2014

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 five straight quarters, which, according to Bloomberg, is the longest losing streak in five years.  Home prices are still  78.90% above their year end 2004 levels. Overall prices levels, as measured by inflation have just increased by 30.33% since year end 2004.  In other words, for the past ten years, Singaporean home prices have outpaced inflation by almost 50 percentage points.

Malaysia


Neighboring Malaysia's House Price Index actually topped out at 181.64 in the second quarter of 2014 and has plateaued at 180.95 for the past two quarters of 2014.  Home prices are 80.95% above their year end 2004 levels.  General price levels are a staggering around 50 percentage points lower, at 30.15% above their year end 2004 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 054% 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 fourth quarter of 2014, home prices have rebounded to 105.44, or 5.44% higher than its year-end 2004 levels, way below its expected inflation adjusted levels. General Price levels are 35.05% above 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 fourth quarter of 2014, home prices have climbed an additional 7.44% to reach 136.57.  Since the first quarter of 2007, home prices have risen 36.57%. Indonesian Home Prices, like Thailand, have lagged inflation since 2007.

Hong Kong

Hong Kong real estate prices have leaped by 219.33% in a little over 10 years to reach a staggering 319.33 from a base of 100 since year-end 2004. General inflation levels have just climbed 35.36% during this same period.  In other words, Hong Kong home prices have outpaced inflation by an astounding 183.96% during this period, the highest rate of appreciation in the countries covered in this post.

Philippines

Philippine house price index stands at 210.64% at the end of the fourth quarter 2014 or over 110.64% 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 fifty 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: Global Property Guide, World Bank, Trading Economics

Construction Gross Value Added as a Percentage of GDP Has Now Surpassed Its Asian Financial Crisis Peak!

Last September 29, 2014, we noted that Construction Gross Value Added (Construction GVA) at 11.20% as of the 1st Semester of 2014 was already well above its historical average of 9.48% 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 year-end 2014, Construction GVA as a percentage of GDP now stands slightly higher at 11.21% of GDP.  But the real story is that Cumulative Construction GVA has gone well above equilibrium and now stands at 1.2% above equilibrium, a rise of 0.8% in just nine months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

The Filipino Worker is Due for a Raise

The Filipino worker is due for a raise.  Although gains in the minimum wage for the National Capital Region (NCR - Top of the Range) have outpaced inflation since 1998, the gains have not kept up with productivity growth.  If wages had kept up with productivity growth, wages would have been around 27% higher as of 2013, or Php 592 per day versus the actual rate of Php 466 per day.  This means that the gains in productivity are being captured by the employers and has been leading to increasing income inequality.

Great Depression vs. Great Recession GDP Growth Rates

For the past few days, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why does the US Recovery from the Great Recession feel so sluggish.

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough in real terms and -0.4% in nominal terms) and took place over two years (2008 to 2009), the recovery in the five years since then has been very anemic.  The economy reached parity with its pre-recession peak GDP in nominal terms in 2010, only three years after the Great Recession started in December 2007.   In real terms, it took an additional year, by 2011, to reach parity with its pre-recession peak.  By 2014, the US economy is only 23% larger, in nominal terms, than the bottom in 2009, averaging only 4.19% growth every year since the Great Recession bottomed out. In real terms, the US economy is only 12% larger than the bottom in 2009, averaging only 2.2% growth every year since 2009.

The overall economic contraction during the Great Depression was much more severe (-46% in nominal terms and -27% in real terms from peak to trough) and took much longer (four years from 1930 to 1933).  In real terms, economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years after the 1933 bottom for the US economy to reach parity (in real terms) with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the four years since the US economy bottomed out in 1933, the US economy was 43.5% larger than the bottom in 1933, averaging 9.44% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"


Given this very sluggish recovery with no end in sight, it is no wonder that Ben Bernanke, who is only 60, said that he doesn't expect the price of money (interest rates) to rise in to its long-term average of around 4 percent in his lifetime.