It looks like the Banko Sentral ng Pilipinas (BSP) will try to match the rates adjustment of the Federal Bank of the US of A to defend the parity of the Philippine Peso vs the US Dollar and to keep inflation controlled if not at bay, in the coming months. So, what does this mean to our housing industry?
First, it means that mortgage rates will adjust upwards as our own BSP increases its overnight repurchase rate (overnight rate is the interest rate at which a depository institution, generally banks, lends or borrows funds from another depository institution in the overnight market. In many countries, the overnight rate is the interest rate the central bank sets to target monetary policy.) This in effect will increase the cost of commercial banks which will then find its way into higher interest cost for loans, both for commercial and consumer lending. In simple terms, the cost of borrowing to purchase a housing unit, whether this be a house and lot package, or a condominium unit will be higher.
So, who is at risk or likely to be impacted with this situation?
Most obviously, the middle to upper middle-income families who are in the market to buy a housing unit at price range of Php6 Million and above. Why Php6 Million and above? This is the funding limit by Pag-IBIG who may not be affected by the BSP’s upward adjustment of mortgage rates. Beyond this amount, buyers’ option is to borrow from private financial institutions whose rates will be higher and therefore monthly amortization will be higher in the coming months versus earlier period. The effect of this is that buyers will most likely postpone acquisition or if cannot be help, look for a lower price unit that will match their affordability level, or increase the down payment portion so that the loanable and the amortization amounts will match what they are willing to allocate out of their income, or even extend the payment terms which has the effect of lowering the periodic installments.
So, developers churning middle income to upper middle income housing units and higher will be impacted as take-up will definitely be slower. For projects already in the pipeline, pre-selling will slow down. Developers may offer generous discount rates to incentivize serious buyers and/or slow down the construction pace up until the situation improves.
A more serious implication of this scenario (if and when the situation persists longer) is a potential increase in default incidents by borrowers will be experiencing higher debt service (those who incurred loans on an adjusted rate mortgage) and developers who are highly leveraged. This will eventually affect the quality of banks’ lending portfolio.
Worst scenario is an economic recession where the situation will be prolonged and a more severe effects on the economy, i.e., job loss, bankruptcy, government deficit, etc. Let’s hope it doesn’t go to that extreme. But then again, we live in a global economic system where extraneous factors that affect our local economy is outside our control. Keep an eye on the Federal Bank’s policy decisions in the coming months.