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Philippine Housing Market and Home Loan Interest Rates

Housing Loan Interest rates Philippines 2021

The housing market is also known as the real estate market or the supply and demand for house and lots in a certain country or region. Normally, the key elements of the housing market are the average house prices and trends in house prices. 

The housing market is composed of stakeholders such as:

  • Homeowners who sell their property.
  • Tenants or renters who made a legal agreement with a landlord to use a certain portion of his property for a year or two or depending on their arrangement.
  • Lessee who made a legal agreement to the lessor to use their property for a certain period. Lessees normally use the whole property and stay longer than renters.
  • Investors that buy and sell properties either for investment or business reasons. These investors either hold the property for a certain period and sell it when it appreciates with their desired amount or percentage or renovate and improve the properties they bought before making them available for listing or in the market to gain more profit.
  • Homebuilders, contractors, and renovators who build and develop communities or subdivisions where home buyers and investors can buy lots for sale or houses and lots for sale. An example of this is Vista Land and Lifescapes Inc. or commonly known as Vista Land. Vista Land is the largest homebuilder in the Philippines that offers a wide range of housing products that cater to the needs of every Filipino from luxurious houses, mid-income housing segments, affordable low-cost housing, and vertical residences. Vista Land is also known for its real estate’s brands such as Brittany, Crown Asia, Camella, Lessandra, and Vista Residences across the Philippines.
  • Real estate brokers and agents that facilitates the process of acquiring a property and furnishing its legal documents such as the deed and title.

The housing market is composed of five features- Supply of housing, Demand for housing, House prices, the Rented sector, and Government intervention in the housing market.

The housing market, like any other asset, is subject to the law of supply and demand. This law is a basic economic principle that defines the relationship between supply and demand for either good, service, and for this instance, property, and how that interaction affects their prices.

The law of supply and demand dictates the stability of the property price. A low supply of housing inventory may cause the prices to go up. For example, if there is a high demand for properties and the supply is not enough for this demand, the price of the property will eventually increase but if the property supply increases and the demand for it decreases, the prices of the properties will eventually go down. 

On the other hand, when the economy is struggling, like the current situation that we are in because of the pandemic, and there is an overproduction of properties, chances are, there will be few demands for houses and lots, which will make its prices to go down.

This is also applied to how the rental sector feature of the housing market affects it. The more house inventory that people purchase means lesser rental demand, and the more people who prefer to rent properties rather than buying them would result in lesser demand for houses and lots.

The government on the other hand plays a big role in the housing market as it can provide subsidies for housing construction and improvements to help increase the supply of houses in areas where there is high demand for it. By increasing the supply of houses the greater chances that its price will decrease.

In the Philippines, the government includes measures intended to facilitate and aid the housing sector to expand and upgrade the supply of houses to the poor. An example of this is the housing projects made by the Local Government Unit or LGU such as the “Land for the Landless” program of the Manila Urban Settlements Office, which aids landless, bonafide poor, low-income informal settlers, and homeless families and BaseCommunity were more than 200 poor families received a housing unit.

Economic Factors Affecting the Housing Market

Growth in the Economy

The housing market demand depends on the revenue or capacity of people to buy properties. The better and continuous economic growth of a country will result in higher wages and spending or buying power. More and more people can afford to buy or mortgage houses and lots because of their income.

During recession or challenging times, like the pandemic that we are in, people who are losing their jobs will consider renting instead of buying properties or will fall behind their mortgage payments and end up in their homes repossessed.

Unemployment 

Another economic factor that affects the housing market is unemployment. With a rampant or high percentage of businesses closing or unemployment, fewer people can afford to buy houses. Fear of job security and unemployment can also stop people from entertaining ideas about getting or mortgaging property as the thought of not consistently paying the mortgage of the property can lead to its repossession.

Customer Trust

Confidence in entering an agreement wherein your hard-earned money will be involved or to take the risk of getting a mortgage to purchase a property is vital. Homebuyers normally postpone getting a property if they are afraid to experience scam and fraudulent activities and when they are not confident with the sudden and drastic changes in house prices.

Availability of Mortgage

With the availability of mortgages, people had an extra option on how to get their dream home, lot, or investment. A mortgage is a legal agreement between a lessee and a lender. The lender can either be bank financing, a government agency or institution, or in-house financing. Getting a mortgage means the lessee gives the lender the right to take their property if they fail to repay the money they borrowed plus interest on the agreed period.

In the Philippines, banks offer low-interest rates with a fixed rate for about one to five years. Government agencies such as Pag-IBIG Home Loan offer fixed pricing for up to 30 years.

On the other hand, In-house financing or owner financing allows borrowers to get a direct housing loan from their real estate developer. Unlike Pag-IBIG housing loan and bank financing, In-house financing is shorter-term and usually would take about five to 10 years.

Price-to-Earning

The price-to-earnings ratio greatly impacts the demand for properties. If the prices of properties are above the wages of the homebuyers living around where it is located, chances are few homebuyers will be interested in that property.

This is also the reason why home builders build different types of properties. These properties are usually based on the buying capacity or wages of the homebuyers – luxurious houses, mid-income housing segments, and affordable low-cost housing.

Interest Rate

According to Banko Sentral ng Pilipinas or BSP, Interest rates are prices. These are the price paid for the use of money for some time and are expressed as a percentage of the total outstanding balance that is either fixed or variable.

In the Philippines, there are two ways by which interest rate can be defined:

  • the point of view of a borrower – which is the cost of borrowing money or borrowing rate
  • from a lender’s point of view- which are the fee charged for lending money or the lending rate.

Interest rates that are charged on the borrower’s funds are classified based on theirmaturity periods such as short-term for less than a year, medium-term for more than one year but less than five years, and long-term for more than five years. Interest rates also vary depending on the type of instruments such as traditional deposit instruments like savings deposit, time deposit, and other on-demand or current accounts, and investment instruments such as bonds, equity, and securities, and on the trend of investment.

How Are Interest Rates Determined in the Philippines

The level of interest rates is determined by the interaction of the supply and demand for funds in the money market. By law, the Bangko Sentral ng Pilipinas can effectively set interest rates. This has been their practice before their full liberalization in 1983.

Image: Bangko Sentral ng Pilipinas, ABS-CBN News

In 1981, the Bangko Sentral ng Pilipinas deregulated all bank rates except short‐term lending rates and by 1983, the deregulation of bank rates was completed with the removal of the remaining ceilings on short‐term lending rates.

Since then, the Bangko Sentral ng Pilipinas has followed a market‐oriented interest rate policy that allows the market to set its rates. With this policy, the Bangko Sentral ng Pilipinas does not regulate the interest rate charged by banks, lending investors, and pawnshops. However, Bangko Sentral ng Pilipinas requires that the interest rates applied must be duly indicated on the pawn ticket in case of pawnshops, the promissory note for the lending investors, and loan agreements in the case of bank loans for transparency purposes. The Monetary Board only sets rates for the Bangko Sentral ng Pilipinas’ overnight borrowing and lending facility to influence the timing, cost, and availability of money and credit, to stabilize the price level.

Factors That Affects Interest Rates

Three factors affect the interest rate in the Philippines- inflation rate, fiscal policy stance, and intermediation cost.

Inflation Rate

When there is too much liquidity in the system, there is more demand for inflation to grow. To control inflationary loads arising from excess liquidity in the system, the Banko Sentral ng Pilipinas needs to increase its policy rates. By increasing its key policy rates, the Banko Sentral ng Pilipinas sends a signal to the market that the interest rates will be uptrend.

Fiscal Policy Stance

The higher the government’s fiscal deficit, the greater the demand to borrow to either the domestic market or abroad to finance its gap. This creates upward pressure on domestic interest rates, especially when the government borrows from a less liquid domestic market.

Intermediation Cost

Financial institutions acquire expenses when they either increase or continue their services. Interest rates will tend to be high when intermediation cost is high. 

Other factors that affect the interest rates include the maturity period of the financial instrument and the perception of risks associated with the instrument.

How Interest Rate Affects the Housing Market

Interest rates affect the housing market in many ways, one of which is the price of the house and lots. When buying a property, the overall mortgage cost is calculated based on the total amount that needs to be paid to the lender throughout the loan. The overall cost of the mortgage varies depending on the interest rates and the price of the property. If interest rates are low, but a home price is high, there is a chance that the overall cost of the mortgage is lower compared to when the interest rates were high, but home prices were low.  

High interest rates can also increase the cost of mortgages. High mortgage payments will prevent prospective homebuyers, especially the low- and moderate-income borrowers, first-time homebuyers, and those living in high-cost areas, to buy or look for properties for sale as the idea of renting is affordable rather than acquiring a property. 

High mortgage prices can also cause either an increasing number of home repossessions or homeowners that are forced to sell their property that is currently on a mortgage to avoid repossession. If property repossession continuous, and there are more property sellers than buyers, the price of the properties will eventually go down as the supply of properties is increasing compared to its demand.

On the other hand, when interest rates are low the marginal efficiency of capital in housing, or the profitability is high. This causes the investment demand for housing purchases to rise. With high demand and low supply of property, the prices of houses will eventually increase. 

Entering a home mortgage is also easier when the interest rates are low. As interest rates are low, future homebuyers are not afraid or don’t have second thoughts about getting a mortgage as they have confidence that they can have the capacity to pay for it monthly.

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