A glance through our end of year market updates is an encouraging read indeed for anyone planning to make the most of the region's real estate markets this year, with bullish forecasts and solid economic fundamentals, all pointing to impressive year-on-year growth.
Markets that have yet to be restrained by cooling measures are perhaps understandably tipped as the biggest winners this year. Jakarta was recently rated the top destination for foreign real estate investment in a survey of 400 property experts, with Bangkok also making the hit-list and to five to 10 percent price growth predictions for the Thai capital in 2013. Malaysia is fast building a reputation as one of the the most investor friendly countries in the region, while the Philippines continues to draw impressive levels of international investment thanks to its political stability, seemingly steadfast economy and a burgeoning gaming industry.
However, not everyone sees the current boom as a ticket to long term prosperity. Analysts drawing parallels with the economic environment that existed immediately prior to the 1997 Asia Financial Crisis are becoming increasingly concerned that the current property boom looks a little too familiar.
Property Report recently received an article co-written by Joe Salcedo and Ian Mariano, two Filipinos based in the U.S. who have worked in real estate for the last seven years and conduct property research and marketing for a firm under the umbrella of Chase International. Overseas Filipino Workers are the principal contributors to the Philippines current property boom, so their studied conclusions seemed worthy of consideration. The insights offer serious pause for thought as we enter what will soon become the Year of the Snake.
On the eve of the 1997 crisis in Asia, Salcedo and Mariano point out that nearly all forecasts were predicting positive, high growth rates for Asian markets in the following years. Large amounts of investment had poured in from foreign banks, with a rapid increase in capital flows from developed to developing countries having created a six-fold increase in six years. Thailand, for example, had experienced a long period of growth, which had in turn created a heated property market with a slew of new developments being built to satisfy ever-growing demand. This was further fuelled by the liberalisation of capital inflows, which lent to local developers, financed by foreign loans.
Just over a decade later, Salcedo and Mariano suggest that the landscape is much the same. Investors from around the globe have been pouring large amounts of cash into Asia, and because their initial bets were successful, many are now doubling down. As a result, countries like the Philippines are enjoying historically high investments from private and public banks in the form of debt, which in turn is used to finance the housing boom through property construction and makes lending to domestic borrowers easier. Such inflows have inspired considerable growth in the countries targeted, but there is also a real danger, says Salenco, that the recipients of all this investment believe the supply of "hot money" will never stop flowing.
In many countries across the region, buyers seem to have once again lost sight of supply and demand. According to Salcedo, people are investing based on "future windfall profits" rather than tried and tested principles like rental income and long term capital appreciation. He quotes Winston Conrad B. Padajinog, senior economist and dean at the school of management, University of Asia the Pacific (UAP), who warns that developers are now supplying a market that does not need housing and building properties merely for investments such as second homes.
When the U.S. property market grew at a rapid pace starting in early 2000, billions of dollars were lent to banks at very low interest rates that in turn passed to home buyers. Even when people could not pay off these mortgages, the American banks continued to lend money until the real estate bubble burst, causing a recession in 2008 that has had profound impact on the world economy ever since.
Salcedo suggests that based on similar trends now evident in Asia, a severe downturn is likely to happen in the next two to four years and that this could even have a bigger impact than the 1997 Asian Financial crisis. For developing countries like the Philippines, such crises almost always start with the bursting of a housing bubble, and despite the short term euphoria, with prices increasing at a staggering rate, cooling these markets will soon become crucial.
In the first quarter of 2012, statistics show that the average price of a luxury 3-bedroom condominium in Makati rose 4.8 percent to US$272 per square foot, up by 10.68 percent in less than twelve months. This year, analysts expect another significant rise in housing stock, with 8,253 units added to the Metro Manila supply, yet high-end residential real estate prices are still likely to rise by another 9.9 percent during the next twelve months. Such increases, says Salcedo, are not sustainable.
As happened last time, the downturn in Asia will most likely start with the property markets then fully bleed into the rest of the region's economies. Unless governments and banks in places like the Philippines, Thailand and Indonesia adopt cooling strategies such as those applied in Hong Kong and Singapore over the last two years, the pop of the New Year champagne corks may soon be joined by the sound of a far less welcome bubbles bursting.
To read the full report by Salcedo and Mariano:
http://renohomeblog.com/2012/12/an-open-letter-to-philippine-p.php
Article source: http://www.thethailandlinks.com/2013/01/02/caveat-emptor/
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