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One of the most common questions I've been getting recently is, is the RE market experiencing a slowdown?
In the past months, brokers have witnessed multiple signs that the market is slowing down. Even without people asking, I, too, ask myself the same question since my year-to-date production has been underwhelming.
Here are three signs that the market is slowing down.
DISCLAIMER: This material is strictly for information purposes only. The views and opinions expressed in this article are mine alone. My views do not necessarily reflect the position of RE/MAX Capital, its other members, or any other RE/MAX franchise.
Evidence #1
A multi-year survey of secondary market transactions (second photo) would show that although the 6M2023 figure recorded an uptick from the previous year, it did at a significantly slower pace (+5.2%) than the 285% and 25% recorded in 6M2021 and 6M2022.
If we were to segment properties by price range and by type, the data would likewise show a drop in the number of transactions for most price segments.
Evidence #2
The photos below show the price/sqm range at which residential condos sell in the secondary market. The tip would be the upper limit, the bottom the lower limit, and the horizontal line as the median.
The charts show that the range has narrowed for Makati and Taguig in 2023. Supposedly, a strong RE market would indicate that the highs and the median prices record upticks from the previous year. Moreover, median prices remain below the Php300K/sqm mark.
Evidence #3
Data from Colliers for the pre-selling market depicts that developers have been launching and selling considerably fewer units SINCE 2018. This graph would show that the slowdown–at least for the primary market–had started even before the pandemic.
How is the pre-selling market related to the secondary market? What's causing the slowdown?
To explain the slowdown, let me show you a diagram I made that depicts how RE prices have risen in the past 15 years. I call this diagram "The PH RE Upswing Cycle."
The cycle begins as developers launch projects.
Developers raise their prices depending on the demand. For example, a village in the South saw prices increase by 8% in 5 months due to high demand in 2008.
The aggressive price increases of the primary market allowed early buyers to profit from their purchases through property flipping significantly. The idea was simple: for as long as primary market prices continued to increase rapidly (due to high demand), buyers were almost assured of booking decent profits. More importantly, buyers only paid the monthly payments–not the full transaction price.
The rapid increase in primary market prices spilled over to the secondary market. For instance, Rockwell Center bolstered the values of surrounding neighborhoods such as Poblacion and Guadalupe Viejo. Evo City in Kawit buoyed values of nearby properties that used to be priced as agricultural land.
As secondary market prices increased, the value of developers' land bank (or property acquisitions) also increased. This, in turn, shall affect the prices at which developers price their new developments.
Lastly, property values are cemented by the zonal value revisions by the BIR. Market players see zonal values as the "floor price"; i.e., selling below these values would be equivalent to selling at a loss. For example, values in Rockwell surpassed the 200K/sqm mark only after the 2017 revision for North Makati.
Between 2005 and 2018, this cycle hastened. Price increases have become a tactic to push buyers to bite the bullet. What seemed to be an "arbitrage opportunity" also attracted foreign investors and further bolstered (condo) demand. Flippers, who profited after their first purchase, bought even more properties. Business owners parked their companies' cash flow in pre-selling projects (this is why some developers offer monthly amortizations of as much as Php700K/mo).
Problem 1
Primary market (PM) prices have increased so much that affordability has become an issue. For example, with home loan rates at ~9%, buyers' monthly salary should be at least Php182,000 to be eligible for a loan to buy a Php9 Mn property. At Php300K/sqm, Php9 Mn would only get buyers a 30 sqm condo. How much are pre-selling projects today?
Case-in-point: The rapid increase in RE prices has dramatically outpaced income growth, so a cutback in demand is only natural. With less demand, developers can introduce fewer price increases.
Problem 2
With fewer price increases, flippers booked less profits, with some just breaking even or, worse, forced to hold the unit. If the developer still has unsold units, chances are many flippers are also stuck with the units.
Despite competing with their inventory, developers can't ban re-assignments outright because property flippers represent a considerable amount of their buyers. Instead, they introduced rules and fees for re-assigning units to discourage flipping. These rules and fees are different for each developer.
Recently, the BIR has begun chasing after re-assigned units, subjecting such transactions to unforeseen taxes and penalties. This move has discouraged buyers from purchasing re-assigned units because the new owners will be responsible for paying these.
Problem 3
With elevated secondary market (SM) prices, home loan rates at 8-9%, and rental yields hovering below 4%, it's only natural for SM demand to decline.
The exodus of migrant workers (POGO and ex-pat) has pushed residential vacancy rates to 17% (Colliers). As these assets become idle, some owners have put these properties for sale, which further increased the supply of condos in the SM.
To make matters worse, the BIR has begun chasing after units that were leased out, subjecting their sale to VAT and income tax.
In conclusion, these factors have caused the upswing cycle to slow dramatically from before–and are driving the slowdown we are seeing today.
As the upswing cycle slows, does this mean RE prices will crash?
First, let's define what a "crash" means. When the mortgage crisis hit the US, housing prices fell 27.4% from their 2006 peak. Let's go with that: Will prices decline by 27% as the cycle slows?
The quick answer is that I don't think so. Indicators I've been monitoring–so far–are still in the green: non-performing loans are at 3%, down from 5% in 2021; the stock market (a symptom of exuberance) still hasn't recovered from pre-pandemic levels (-5% YTD); GDP growth is still on an uptrend and inflation on the downtrend.
But will prices go down, even by a bit?
If we're talking about ASKING prices, then yes. We've seen more units sold below the zonal values (ZV). For example, when Makati ZVs were revised in 2021/2022, ZVs increased by as much as 69% from the last revision in 2017. And from the looks of it, buyers refuse to accept the new values established by the BIR. Thus, there's downward pressure on ASKING prices. On the other hand, DONE prices have continued to increase, albeit marginally (see Tuesday's post showing median price/sqm).
What has been supporting the prices?
1. The over-centralization of commerce in Makati/BGC. Metro Manila's traffic situation is so bad that having a halfway home (condo in a CBD) is the new norm–or at least everyone's goal.
[Factors 2 and 3 only apply to high-end/ultra-high-end properties.]
2. Prices of lots in gated villages have risen so much that even the rich can no longer afford them. Imagine if you had a billion pesos and had four children. That would no longer be enough to purchase a property for each kid in any of Makati's prime villages. So, what's the next best thing? Ultra-luxury condos.
Why not buy in Alabang, where it's cheaper? Most find it too far from where they live [see number 1].
3. There's no need to sell. Some (high-end) units for lease have been vacant for over a year. Still, owners refuse to adjust their rental prices. It seems they have other sources of income and can afford to "wait out" any slowdown in the market.
So, you could say this slowdown is a healthy correction.
Risks to Forecasts
Last week, I concluded that I don't think the market will crash. However, I perceive two risks to this call: the hole left by Mainland Chinese Buyers (MCB) and the Comprehensive Tax Reform Program (CTRP).
1. Mainland Chinese Buyers (MCB)
Have you heard of stories where supposedly MCBs bought units by the floor? They're actually brokers–not buyers. They reserved the units, returned to China, and sold them to retail buyers. The light payment terms and the growth of POGO operations in the country seemed to lure these buyers. Units were sold out, and projects maxed out their foreign allocation. It isn't clear how these buyers should remit balloon payments for their purchases since isn't it prohibited to bring capital out of China?
The POGO exodus and the pandemic happened. So far, it seems that many of these MCBs have backed out from their purchases since developers are re-advertising "re-opened" units of (supposedly) sold-out projects. Many of these condos are turning over next year, and canceled contracts may severely strain developers' cash flow, which in turn may lead to defaults.
2. Comprehensive Tax Reform Program (CTRP)
Not long from now, the government will implement the third leg of tax reform. This leg aims to align the RE valuations of the government, particularly the BIR's and the City Assessors'. Aligning the two will allow the LGUs to collect more taxes (Real Property Tax; RPT). To depict the effect of this reform, here's an example of a condo in Pasig.
Before CTRP
Zonal: P11.3 Mn
Assessed Value (AV): P3.9 Mn
RPT: P12.7K/year or P1.06K/monthly
After CTRP
Zonal: P11.3 Mn
AV: P11.3 Mn
RPT: P99.2K/year or P8.27K/monthly
The increase is probably acceptable if the unit is in use. But what if you have several units for lease and are unoccupied? Will you sell these idle assets? Will the government become more proactive in auctioning off properties due to the non-payment of RPT? Some developers are sitting on tens of thousands of hectares of idle land. How would they address their land banks' significant increase in holding costs?
In summary, it isn't clear how the market players would react to these market and legal risks. Only time will tell.
Here are the questions and takeaways from my report.
1. When do you think will the RE market recover?
I think the downward pressure on prices will recover once the office sector's occupancy rate returns to single-digit territory (around 2026). Currently, the sector's vacancy is at 17% to 21%, depending on whose report you read. What's alarming is that the Bay Area's vacancy is north of 20%.
2. Your report seems to focus on condos; what about land?
Most of the data collected from the survey are condo sales. The scarcity of data for any particular village makes it harder to find meaningful patterns. But if you're curious as to how the graph would look like, see the photos below.
The graph shows the total transaction count for gated villages. Note that the red bar only pertains to 1H2023, while the rest pertains to full-year counts. The data suggests the same findings as I've previously reported.
I would be less worried about horizontal developments (HDs). Foreigners can't own land; therefore, HDs are less susceptible to speculation (like how the Chinese have pushed home prices in Canada/Australia).
Takeaways:
Sellers:
+ If you need the cash, consider lowering your selling price or profit expectations.
+ If you don't need the cash and can afford the expected jump in holding costs, sit on the property. RE has always been a long-term play (15-30 years).
Buyers:
+ I wouldn't be as worried if you're buying for end-use. For lots, buy in gated villages; For condos, buy in established CBDs. If possible, stick with high-end projects by publicly listed companies.
+ If you're buying a pre-selling property and expecting to flip it on the turnover date, I wouldn't count on it. But if you still want to play this game, make sure you can pay for the balance if you cannot flip it.
+ If you can't find the perfect property, don't force it–rent. The slowdown also means you have more time to look for that property.
Brokers:
+ I would be cautious about using RE's historical double-digit returns to convince buyers. As I've pointed out in previous posts, the "arbitrage opportunity" we saw between 2010 and 2018 is long gone.
And that wraps up my 1H2023 report. Thanks for reading!
DISCLAIMER: This material is strictly for information purposes only. The views and opinions expressed in this article are mine alone. My views do not necessarily reflect the position of RE/MAX Capital, its other members, or any other RE/MAX franchise.
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