Surge in Philippine property prices threaten banking system

A boom in the POGO sector led to a 10% YoY rise in residential real estate prices in Q3 2019.

Philippine property prices have been surging over the past three quarters, posing a threat to the country’s banking system and market stability, a Fitch Ratings report said.

Philippine banks’ exposure to the real estate sector has been stable at around 20% of total bank loans since 2015, but credit growth has been high at 14% system credit CAGR from 2015 to Q3 2019. Credit implications on the banks will depend partly on their underwriting standards, the report said. Relaxing loan-to-value (LTV) limits or debt-service ratios, or moving towards excessive loan tenors could affect their rating profiles.

A boom in the Philippine offshore gaming operators (POGO) sector has led to a 10% YoY increase in national residential real estate prices in Q3 2019, with condominium prices in the capital region ballooning by an unsustainable 34% YoY. It also partly reflects a 75bp decline in policy interest rates since April 2019.

Prolonged rapid house price inflation can push borrowers to take on more debt to afford increasingly expensive homes, and developers to over-invest in future supply, the report noted.

“Both trends have a tendency to raise private-sector leverage, making the economy more susceptible to downside risks. Studies show that asset bubbles fuelled by credit booms typically lead to deeper and longer downturns,” Fitch said.

Fitch suggests a regulatory requirement that banks demonstrate common equity Tier 1 and total capital ratios of 6% and 10%, respectively, after writing off 25% of their real-estate exposures. This should help ensure that loss-absorption buffers keep pace with their exposure to the sector, they said.

Photo courtesy of Pexels.com.