Sunday, September 12, 2010

The Upcoming Boom In The Philippine Property Sector

``The dominant ideology favors “cheap money.” It also favors high commodity prices, but not always high stock market prices. The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.” Ludwig von Mises

Here is one more prediction.

The current “boom” phase will not be limited to the stock market but will likely spread across domestic assets.

This means that over the coming years, the domestic property sector will likewise experience euphoria.

For all of the reasons mentioned above, external and internal liquidity, policy divergences between domestic and global economies, policy traction amplified by savings, suppressed real interest rate, the dearth of systemic leverage, the unimpaired banking system and underdeveloped markets—could underpin such dynamics.


As one would note from the ADB chart[1], following the Asian Crisis, ASEAN economies have had little exposure to property loans.


And despite the recent surge in property prices in developed Asia[2], this hasn’t reached frothy levels yet, except for Hong Kong.

Thus the environment of low leverage and prolonged stagnation in property values is likely to get a structural facelift from policy inducements, such as suppressed interest rates which are likely to trigger an inflation fuelled boom by generating massive misdirection of resources-or malinvestments.

Of course many would argue on a myriad of tangential or superficial reasons: economic growth, rising middle class, urbanization and etc... But these would mainly signify as mainstream drivels, as media and the experts will seek to rationalize market action on anything that would seem fashionable.

And the business cycle will be left unheard of until perhaps the realization of a bust.

As Murray N. Rothbard explained[3] (bold emphasis mine)

``For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

``Businesses, in short, happily borrow the newly expanded bank money that is coming to them at cheaper rates; they use the money to invest in capital goods, and eventually this money gets paid out in higher rents to land, and higher wages to workers in the capital goods industries. The increased business demand bids up labor costs, but businesses think they can pay these higher costs because they have been fooled by the government-and-bank intervention in the loan market and its decisively important tampering with the interest-rate signal of the marketplace.”


If I read into the price actions of the major components of the publicly listed Philippine property sector, arranged according to biggest weighting: Ayala Land (ALI-black candle), SM Prime Holdings (SMPH-gray line), Megaworld (MEG-blue line), Robinsons Land (RLC-maroon line), Filinvest Land (FLI-green), Belle Resources (BEL-pink) Vista Land (VLL-red) and SM Development Corp (SMDC-orange) they seem to chime on the same tune—a forthcoming property boom.

And please don’t insist of any outlandish and unproven micro-fundamental based actions (earnings, dividends and etc...) because the picture clearly shows that in the uniformity of price actions, there isn’t any.

Instead it has clearly been my Machlup-Livermore paradigm at work.

[1] Asian Economic Monitor, July 2010

[2] Deutsche Bank, Asian property markets: No significant bubbles – yet!, June 23, 2010

[3] Rothbard, Murray N. Economic Depressions: Their Cause and Cure

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