Osmeña: Real estate financing fiasco

Antonio v. Osmeña
Estatements

THE ridiculous failure of the subprime mortgage program has brought about a worldwide economic crisis, causing millions of home foreclosure in America. It will probably take five years for the American economy, specifically the real estate industry, to recover.

Interestingly in Cebu, subdivision development has mushroomed.

The CEOs who are responsible for the execution of developing residential subdivisions all over Metro Cebu believe that there is a continuing demand to own a home. There seems to be vague information about the forces influencing real estate supply and demand.

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Property owners who are enthusiastic to make their land productive need to combine the units of labor and capital to avoid mortgage foreclosure.

The landowners need to consider an analysis of the real estate market such as: (1) changes in number of population and family composition; (2) wage levels, employment opportunities, and stability of income; (3) personal savings, supply of mortgage funds and interest rates; (4) rent levels, vacancies, and rent controls; (5) taxation and land use control; (6) supply of land, cost of land, labor, and building materials; and (7) changes in the arts and building obsolescence.

These days, a home, like any other consumer good, may be purchased on time. Mortgage credit is based largely on stability of future income rather than on accumulated savings.

The advantages of borrowing to buy a home are generally most measurable in monetary terms. The home is one of the most essential parts of family life and the returns that flow from home ownership are rightfully classified as “psychic income” or amenities. To the Filipino way of life, home ownership is deemed very important that home purchase plans, largely mortgage-financed, and often government-approved mortgage, are accepted as a national policy. Unfortunately, the “easy” purchase plan, often government-backed and secured (like the Pag-ibig Fund), has tempted many families into prematurely undertaking the responsibilities of home ownership. To their sorrow, they learn that home ownership is an important venture and must be carefully planned.

Mortgage credit policy may be called the barometer of the residential real estate market. Most homes are bought on credit. Terms, therefore, are an important part of a purchase transaction and often influence the transaction price.

The political will of Bangko Sentral plays an important factor in the stability of real estate financing. The Asian economic crisis of 1997 caused the interest rate to balloon to 35 percent, causing many real estate developments to collapse.

Will the stable interest rate during the Arroyo administration continue after the 2010 elections? Most realty developers borrow funds based on the principle of trading on the equity.

In conformity with this principle, it is economically advisable to borrow funds when the use of such funds brings a higher rate of return than the rate, or cost, of borrowing.

However, even if care has been taken to ensure that the project to be financed is well conceived and reliance to meet the loan obligations is placed not only on the income-producing power of the property but also on the financial integrity and ability of the borrower, political instability and a repeat of an Asian economic crisis could fold down the project. Since there is no valid, long-range government planning, land developers tend to foretell events by crystal ball gazing and find “economic forecasting” unreliable because the present economic model has reached its obsolescence. Unfortunately the real estate activity has experienced political cyclical swings that have been recurring since the early 1970s. This real estate cycle indicates a definite relationship between real estate and general business activity.