The real cause of the 1996 Philippine Property Crash and why it's unlikely to repeat

[Euro Chocozone Buyer]

The real cause of the 1996 Philippine Property Crash, and why it's unlikely to repeat

 

Hi

https://en.wikipedia.org/wiki/Demographics_of_the_Philippines
https://psa.gov.ph/content/population-national-capital-region-based-2015-census-population-0

Just as I discovered that during WW2 there was a sharp drop in the birth rates due to the soldiers being at the front not being
able to conceive children, I discovered an exactly identical pattern for both Korea and the Philippines, and we can see that
births decined sharply from 1955 to 1958 (from 735K to 484K), that is a 33pct decline, which quickly reversed itself after the
Korean war ended, just like birthrates in W Europe quickly reversed after WW2. So if we add 40 years - to the 1940 peak
for Europe we suddenly find the early 80s crisis which - in nature - was exactly the same crisis as the 1996 Asian financial crisis,
-- because this is a real drop in demand. --- And it is just recently that the demographics data for PH has become available on
wikipedia. I already suspected that the Korean War had something to do with the Philippine Property Crash and this is
then my final idea of the cause of the PH Property crash in 1996 which lasted 4-5 years I believe .
(France births dropping from 620K in 1939 to 520K in 1941, that is a 20pct decline in demand 40 year later which
is what my research is telling me that demand models are better at forecasting than supply models)
40-41 years of age is when most people has saved enough to make their first home purchase.
Yes this must have been a horrible time, a 20decline in Europe compared with a 33pct decline in PH.
The 1996-2000 PH property crash was entirely predictable by my DEMAND Models.

So before I make a property investment I always watch the 40 year timespan to see what happens to the direction of
birth rates, and at least for PH, it is still rising moderately, while it is now starting to decline for many countries.
The problem with most of the developed world is that this trend will drop for a very long time, -- and it would have been
better if the decline had been short lived -- but we are looking at broad stagnation -- a kind of slow motion crash that
will last decades I am afraid. (and now Vietnam has the war curse which is why I avoid it)

Which is why I believe that a 1996 property crash in PH today is extremely unlikely, -- we might see slower growth or a few
years of slightly negative growth, but a real crash, like a 30-40pct drop in capital values in extremely unlikely in my opinion.

And so investing i see more as riding a wave, -- rather than cyclical occurances, because cycles imply that rises and falls
alternate regularly but I only look at the wave to make my prediction, -- and I don't buy any theory of an 18 year property cycle,
or any other time cycle for that matter. I only understand "waves" -- I do not understand "cycles", nor do I understand "supply
of buildings". Investing is like riding on a wave, and making sure that more "fools" are behind you in that wave, and the
best exit strategy is to "exit" the wave when most people are entering the market. That is when the wave will be the highest,
I see that so often when people surf on the water on a wave. It is the wave (of new entrants) which lifts you higher and causes
your investment to rise in value that I am searching for. When more people "exit the system" like Japan in the early 90s,
you fall into and under water so that's what must be avoided.

And once and for all, I do not look at supply of property to make predictions. I am only a demand analyst, and PH real estate
is in much better shape now than in 1996, which was a demand collapse kind of a crash. It had nothing to do
with supply in my opinion. So I completely "IGNORE" supply -- i don't look at it at all -- to understand it better.
I also believe that those people who have money and are waiting for a 30-40pct crash in PH prices are going
to be disappointed as i believe the chances for such a scenario are extremely unlikely.

On a side note, i have written about the population growth in Asian cities and the correlation to Prop prices, -- about the
correlation of prop prices to population growth in Belgium, and now I am seeing the same pattern repeat in PH.

We can see that Taguig had the fastest population growth, and it also had the fastest property price rise, and I believe
Taguig still has the fastest population growth, so that might somehow have predicted the rise of BGC property prices.
This rapid population growth, combined with the stock exchange coming, probably means that BGC is likely
to overtake Makati as the prime financial district, and it would imply more rapidly rising property values in Taguig than in Makati.
In addition, we see MANDALUYONG-Pasig as having the second highest population growth, so that might
indicate their resilience in terms of not suffering price declines (as of now), -- and it might also indicate that
people who find MAKATI and BGC too expensive are choosing to live very close to those 2 districts.
And so this area - ORTIGAS (Manda, Pasig, Ortigas) is the second best area,
while Makati's growth in terms of appreciation will not be as strong as the other 2. (BGC and Ortigas).

That is what the demand models are telling. Taguig-BGC soon overtaking Makati and values to rise faster than Makati.
Ortigas a second and Makati the third spot.

And so this is the real reason why I am not panicking. The real panic will start in cities like London, HOng Kong, Singapore
Canada -- the only thing that could save them is a huge immigration wave but this is extremely unlikely in my opinion
as the entire world will become Japanized now. The financial industry will make credits available to all these new
PH buyers -- I am quite confident of this.

[drbubb]

"A 1996 property crash in PH today is extremely unlikely"

I tend to agree, but we may still see a meaningful correction

 

Because, I see the major cyclical influences a bit differently

For me, the important 18-year cycle peaked in 1997

 

I am expecting another important peak in 2016-17.

The normal cycle is: 14 years up (from the 2002/3 low), followed by 3-5 years down. So I would expect a correction into 2019-21.

 

Because the rally of the last several years was not as sharply up-sloping as into the 1997 peak, I am expecting a more gentle correction than we saw in the last downturn.

 

Over the last several years, Rents and Capital values ran ahead of CPI inflation. And there is now a gap of about XX%.

(Calculation at Q1-2016: CapValue: P 152.0k / Equiv. Price Inflation: P 114.4k is 75% of CapValue )

 

If inflation continues to rise at say 2-3% p.a., then I would expect CPI to narrow the gap by 8-12% over the next four years.

 

 

So a drop of maybe 15% in Rents and Capital Values may be all we need to see to bring Property values back into balance with long term price inflation. (That makes good practical sense, if we take price inflation as a proxy for incomes of workers in the Makati area.) However, that assumes than healthy economic growth continues in the Philippines. If something dramatic happened, like a serious global recession, the needed correction could be deeper than that.

 

On the positive side, we could see something like a drop in mortgage rates from the current 5-6% level, which would help to hold up Capital values, even if Rents fell 10-15%, which seems likely at this point in time.