RP property boom ‘worrisome’

Written by Cai U. Ordinario/ Reporter

Wednesday, 25 March 2009 01:07

THE boom being experienced by the real-estate industry in the Philippines, as well as in select emerging markets in Asia, is, ironically, a cause for concern because of the possible negative effects it may have on the economy, according to the latest publication of the United Nations Economic and Social Commission for Asia and the Pacific (Unescap). The Unescap report, titled “The Current Global Financial Turmoil and Asian Developing Countries,” discussed the origins of the global financial crisis with how it started in the United States, and the lessons from the 1997 Asian financial crisis. The report said there was evidence a number of industrial countries and emerging markets in Asia—Indonesia, Japan, South Korea, Malaysia, Singapore, Thailand, Hong Kong, China and the Philippines—have experienced asset-price increases of more than 10 percent. “Recent booms in housing and equity markets in Asia are a source of concern because of their potential adverse macroeconomic consequences. Such booms, defined as periods in which asset prices exceed their trend by more than 10 percent, significantly raise the probability of output being eventually pushed below its potential level and the price level above its trend,” the report stated. “This implies that monetary and capital-account policies should not neglect developments in asset markets, since their longer-term consequences may undermine price stability and growth,” it added. The report said there are even cases when house prices outstripped strong growth in incomes. As a result, housing loans have expanded faster than other types of lending, and have been a major factor in sharp increases in household indebtedness. In South Korea, for instance, bank lending to households has been growing rapidly since 2005, and household debt has reached 140 percent of disposable income—above the level of household indebtedness in the United States. “While detailed data are limited, there are indications that foreign demand for commercial space, as well as speculative purchases motivated by strong prices, has made an important contribution to the boom in property markets in India and China,” the report stated. Unescap said the appropriate policy response is to expand domestic demand through fiscal stimulus, taking into account that a small dose of deceleration of growth toward more sustainable levels could be desirable. The report said it is important that policy interventions are aimed at smoothing correction in asset prices and facilitating restructuring in sectors which have been over-stretched, thanks to easy financing conditions in recent years. It is also important for countries to expand public spending in areas such as health, education and social security, as well as transfers to poorer households financed, at least partly, by greater dividend payments by state-owned enterprises which can play an important role in lifting consumption spending. “If needed, this expenditure policy can also be combined with tighter credit policy in order to check the rapid growth in investment. Any incentive that higher interest rates may generate for arbitrage flows may be offset by tighter capital controls, including implicit and explicit taxes and administrative restrictions,” the report said.