Caution sounded on real-estate investments

By Jun Vallecera
Reporter

SOME banks fear companies and individuals have invested an inordinate amount of resources in real estate and warn this could prove a problem soon.    

According to Joey Bermudez, president of Chinatrust Bank, more and more people are into the acquisition of land as substitute for the relative lack of investment outlets at the moment.       

The activity has been forced by the fact that interest rates have retreated to levels not seen in four or five years with the single biggest borrower, the government, increasingly able to resist the temptation to borrow.  

"As rates come down faster than you can rein in inflation, this becomes a disincentive to save. So, people will instead buy assets, go to hedge funds, and then you have bubble," Bermudez said.       

He acknowledged that asset prices have only started to inflate but unless all that free resource finds legitimate purposes soon, problems could arise in the near future.          

"Prolonged liquidity could lead to asset bubble. This must find purpose. There must be a legitimate use of funds, otherwise this will find its way to assets and create a bubble in the property sector," Bermudez said.    

He said this development was the immediate trigger that caused the collapse of the Thai economy in 1997, and which led to a regionwide financial crisis.              

The monetary authorities tossed the thought around for a moment on Wednesday and came back saying they do not see it coming just yet.         

"Theoretically low, low interest rates precede asset price inflation. However, I don't see evidence on it yet. We continue to monitor the markets," deputy Bangko Sentral ng Pilipinas governor said in a text message. 

BSP data show bank lending for the acquisition of real estate have been trending up consistently the past 14 quarters in a row or for three and a half years already.   

Seventy-five percent of all real estate lending by thrift banks as of end-September 2006 or P53.1 billion were for the acquisition of lots for residential purposes and the balance, equal to P17.4 billion, were for commercial intent.               

Commercial bank exposure to real estate has also been on the uptrend in the same period, the same having risen again by 2.2 percent to P214.8 billion from only P210.2 billion three months earlier.

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