A POSSIBLE DANGER ZONE IN THE HOUSING SECTOR

The 4th National Convention of the Organization of Socialized Housing Developers of the Philippines, (OSHDP) will be held at the Marco Polo Hotel, Davao, on August 28-29, 2013.

Mr. Ramon CF Cuervo III and Vice President Jejomar Binay, Chairman of Housing & Urban Development Coordinating Council

Mr. Ramon CF Cuervo III and Vice President Jejomar Binay, Chairman of Housing & Urban Development Coordinating Council

The convention, supported by the Housing and Urban Development Council (HUDCC) and other government agencies, will be attended by Vice President and HUDCC Chairman Jejomar Binay.

OSHDPs Sonny Ducay, Atty. Christopher Ryan Tan, the Secretary-General & Convention Chair and National President of OSHDP, respectively, said that in the convention, real estate developers and other practitioners advocating for socialized and low-cost housing will tackle four major concerns; permitting, financing, regulatory and production. They added that new technology which can be utilized to lower the cost of construction and the proposal to increase the pricing for vertical and horizontal housing unit will be discussed to the participants.

Atty. Christopher Ryan Tan and Mr. Ramon CF Cuervo III

Atty. Christopher Ryan Tan and Mr. Ramon CF Cuervo III

Secretary-General Ducay said that for horizontal housing projects, a house and lot package, with the government mandated of 18 square meters as standard floor area, should be increased to P450,000 from P400,00 while for vertical housing projects, which include the low-rise and high rise condominium in in NCR, Metro Cebu and Metro Davao, should be increased to a maximum price of P850,000, and P750,000 for the other highly-urbanized cities in the country.

Samar (2nd District) Representative, Mel Senen S. Sarmiento

Samar (2nd District) Representative, Mel Senen S. Sarmiento

Atty. Tan  added that “price is no longer effective of the goods we obtained” and the increasing prices of construction materials, land to be utilized, labor should be put into consideration. They don’t want to compromise the market with the use of low quality construction materials

Last August 8, 2013, Western Samar (2nd District) Representative, Mel Senen S. Sarmiento filed House Bill No. 84 or the proposed Real Property Valuation and Assessment Reforms Act, to ensure a uniform set of standards of valuation in the country and correct inefficiencies in the allocation and utilization of the land market. Rep. Sarmiento said “”There is need to remove the existence of multiple, unrealistic and corruption-prone system of land valuation in the country”.

I have to bring the attention of this group  requesting the housing road map, to avoid the same pitfall that happened in the U.S.A. year 2007-08, that resulted to a global economic crisis.

Expert of Securitization Daisy Dulay and Mr. Ramon CF Cuervo III

Expert of Securitization Daisy Dulay and Mr. Ramon CF Cuervo III

“The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for sub-prime borrowers, overvaluation of bundled sub-prime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making.” (Wikipedia Oct. 2012)

One of the dangers in our country is the practice by some developers of socialized and middle cost housing to de facto “overstate” or inflate their “sales” of house & lot packages to  the National Home Mortgage Finance Corporation, or NHMFC , banks and other financial institutions.   The same overstated sales are also reflected in the book value of projects guaranteed by the Home Guarantee Corporation, or HGC.

Pag-IBIG Fund CEO, Atty. Darlene Marie B. Berberabe

Pag-IBIG Fund CEO, Atty. Darlene Marie B. Berberabe

Unfortunately, these reported “sales” are not based on the selling price of house and lots but “contacts – to – sell,” which are effectively cash payments equivalent to only 25% to 30% of the contract price.   The developer’s future receivables from the buyers are then bought by the government at a discounted price.  Pag-IBIG advances to the developer his/her development cost.  In theory, the developer can use the proceeds to start another round of housing development to alleviate the housing backlog.

Due to the government housing agencies, not only will the developer have a faster recovery period for investment, most of the risks attendant to development will be absorbed by the government housing agencies.  The HGC, which guarantees the payments are exposed to the risk and dangers of defaults, or non-payments and “empty promises.”

But not only is the government saddled with default risks, it also subsidizes other add-on costs in housing development.  What happens is that for every sale of a receivable, the agent/seller receives a percentage commission from the contract price. Therefore, this added sales expense plus the interest on the receivable adds up to the value of the guaranteed security.

By adding all these expenses, commissions, overhead and handling cost will eventually balloon the contract to sell at a much higher value that is not within the acceptable Market Value range that can be absorbed by a secondary market buyer should the receivable fail, or when the buyer defaults its monthly amortization payments.  Because of the implicit value inflation and the imbalance in information and risk assignments, it is no wonder that government housing agencies are prone to losses.

However, this is not the only danger in housing finance.  Magnifying these risks is the high liquidity of the banking industry that is the fuel that moves the housing sector to borrow and developers to over-invest using cheap money.  Liquidity, or having “lots of Cash” to lend, is good. However, like fuel with fire, it can turn to a disaster, explosion, and trigger the bust for the housing boom.  Unfortunately, the housing sector and the banking industry are so opaque that it is difficult to gauge when a tipping point in the industry may be reached.

Like the financial crisis in the USA in 2008, we in the Philippines should be on our guard and not fall into the same trap. I can foresee, a clear and present danger, if Developers, Banks, the NHMFC & HGC do not set up controls as to the practice of Discounting, selling of Receivables and Derivatives.

Hedging on debts is a risky operation. Therefore, I suggest that the policy makers and legislators should look closely to our housing sector. In the end, the focus should reach all the way down to the home buyer, who pays the monthly amortization. Moreover the adoption and  implementation of  Financial Standards as well as Audit and  Risk Management best practices must also be uniformly-clear among all the stakeholders of the Housing sector, particularly the developers that depend on “discounting” or securitization to obtain cash flow for construction and profits for their business operations.

Sources:

Sun Star Davao

OVP.Gov.PH

PNA

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