BSP’s Silent Stimulus Has Had Tepid Results to the Philippine Property Sector in 1Q 2016! More Signs of Mounting Excess Capacity!

For the 1Q 2016, prices in Asia’s housing markets have been generally been weakening. According to the Global Property Guide, “Asian housing markets weakening, except China. Six of the eleven Asian markets for which figures are available saw house price increases during the year to Q1 2016, though most were just modest increases. In fact, only China's house prices rose strongly last year. Six Asian housing markets were stronger in Q1 2016 compared to a year earlier.” (bold original)

The regional slowdown means that the Philippines have been part of the current dynamic, where the "average price of 3-bedroom condominium units in Makati CBD rose by 3.9% during the year to Q1 2016, from y-o-y increases of 2.96% in Q4 2015, 5.41% in Q3 2015, and 6.61% in Q2 2015 and 5.4% in Q1 2015. Housing prices increased 2.54% q-o-q during Q1 2016".

So while high end property prices partially recovered from a big slowdown in 4Q 2015 on a quarterly basis, which essentially validates my suspicions last year, for the comparative 1Q period of 2015 (+5.4%) and 2016 (+3.9%), present growth rates have indicated of a 27% downturn in growth rates!

Positive growth still means demand outstripping or growing faster than supply though. So even if demand may slow, for as long as supply slows faster, then prices will reflect on positive growth. Or a credit fueled demand may have temporarily juiced up demand relative to supply.

The latter seems to signify the current operating environment of the Philippine property sector.

Here is how Philippine property prices (residential) performed during the 4Q 2015, according to the Bank for International Settlements data

It’s not just the perspective in the slowdown in 4Q 2015 housing prices, where BIS housing prices essentially confirmed the Global Property Guide’s observations.

But a more important factor has been that over the 6 year period (2009-2015), the boom bust cycle appears to have emerged. To wit, following a boom, Philippine housing (high end) property prices seem to have hit an inflection point and has been headed down!

The BSP’s monumental shift in monetary accommodation in 2009 lubricated a run in housing prices from 2009-2013. Yet the rate of growth of residential property prices peaked during the 2H of 2013. From there, it has been downhill.

So Q4 2015 and Q1 2016 numbers seem to only reinforce the current long term housing price dynamics.

And the more interesting factor is how money supply growth has coincided with housing property prices (lower window). The 10 month 30%+++ money supply growth in 2H 2013 to 1H 2014 seems to have been very crucial in the powering of housing prices to its zenith.

Since money supply growth petered out (partly due to the BSP’s slight tightening) in 2014, housing prices followed suit.

And now that the BSP launched a silent stimulus 4Q 2015-1Q 2016, such has filtered into housing prices as indicated by the Global Property Guide.

This appears to be similar in the way the Chinese government reignited their housing bubble with a whopping 1Q 2016 credit expansion to the tune of over USD$1 trillion!

And here is an even more interesting observation. While residential prices have been trending lower in Makati, land prices rebounded strongly (13.63%) in the 4Q of 2015.

The divergence is stunning. It seems to show that property developers continue with their race to build supply (thus the aggressive bids on land prices) even as topline growth (now confirmed in real estate sales by PSE listed firms in 1Q 2016) has been tapering!

If such dynamic holds then we are bound to see even more pronounced massive debt financed surplus capacity for the sector!

And yet more signs of the effects of the BSP’s silent stimulus in the context of the government’s measure of construction wholesale and retail prices.

Construction prices have almost simultaneously bounced backed in 1Q 2016!

From here it would look as if construction boom have been perked up again.

But such doesn’t seem to be the case.

An even more fascinating development has been that while real estate prices and construction prices have both rebounded, growth rates in construction permits have remained stagnant!

While it may be true, that the number of construction permits grew by 10.41% in the 1Q, the broader picture says that mom and pop construction activities have been mainly responsible for this. That’s because total floor area of indicated construction dropped by 2.9% over the same period, while total value of construction have dropped by a big 5.7%!

So smaller projects have been booming while bigger projects have been down.

Overall since the GDP is measured in terms of money spending, decline in the value of construction doesn’t speak well of the construction GDP. This means that in order to save the construction sector (statistical GDP), the government has to take its place (along with it the consequences).

And the biggest decline for the construction permits had emerged from residential activities. Residential floor area and value skidded -2.55% and -9.7% respectively. This compares to non residential which registered a mix showing of -.04 decline in floor area while value jumped 7.46%.

If construction permits have been accurate indicators of present and coming construction activities, then these numbers hardly corroborates a strong rebound in the real estate-construction sector.

And here’s more. The slowdown in construction permits appear to be reinforced by the BSP’s banking loans to the construction industry. Growth rates have fallen to 22.2% last April. It’s been in a downtrend since 2013. Such sagging trend has been in place, in spite of the BSP’s silent stimulus!

And while banking loans to the property sector spiked in January and February, it has declined in March and April. Banking loan growth rates to the sector has fallen back to 3Q 2015 levels.

Of course, we can’t rely on the sanctity of statistics because they have most been likely to be underreported. Perhaps, loans to the property sector are being alternatively financed through shadow banks, through off balance sheets, through diversion of loans from other industries to the real estate sector, through the bond markets, through intercompany loans, through private placements or through many other probable means.

Credit growth from stealth monetary easing has only incited massive wave of speculations similar to the present activities at the PSE even when construction activities demonstrate stark sluggishness.

What this only has shown has been of money illusion from the reopening of the monetary spigot by the BSP to rescue asset prices, the GDP and possibly to finance election spending.

And the ramifications from these have been to deepen economic discoordination as manifested by indications of broadening excess supply!

Desperate times calls for desperate measures?