FITCH: NEW PHILIPPINE PROPERTY INDEX ADDS TO RISK MONITORING KIT

The Philippines' first nation-wide residential real-estate price index provides valuable information on the state of the property market and is consistent with the overall strengthening of market and regulatory tools and frameworks, says Fitch Ratings. The broad-based residential price index, which was released by the central bank on Monday, will enhance the information available for policymaking, improve market transparency and should be positive for banks' risk monitoring.

Data released showed brisk but not excessive property price growth, suggesting that robust real-estate activity over the last few years has not led to significant overheating in the property market.

Loans for real estate purposes, which make up about 19% of total loans, have increased rapidly since 2010, raising questions around potential overheating in the property market. Property lending rose at an average of 22% a year from 2010-2013, well ahead of overall average loan growth of around 12%. Real-estate lending growth has slowed since then, following tighter regulations introduced in 2014, which include a real-estate stress test and 60% cap on property collateral values. However, real-estate lending growth remains high, with an annualised increase of 17% for June 2014 to end-2015.

Fitch assesses that rated banks in the Philippines have mostly managed their property risks prudently amid rapid lending growth, with adequate risk controls and lending standards in place. Notably too, the increases in the price index- though a limited dataset thus far - do not appear untenable alongside continued strong economic growth. Real GDP in the Philippines expanded 5.8% in 2015 and Fitch expects this to accelerate to above 6% this year. The price index for the National Capital Region around Manila increased 9.7% yoy for 1Q16 and rose 9.4% in areas outside Metro Manila.
Rising incomes amid sustained economic growth should continue to drive robust real estate activity and loan growth for the Philippines banking sector through the medium term. Property prices are an important macro-prudential risk indicator and excessive price inflation can be a sign of speculative overheating, leading to elevated risks to bank asset quality and profitability. For now, this does not appear to be the case in the Philippines and asset quality remains benign amid what appears to be sustainable price appreciation. Residential and commercial real estate NPL ratios were 3.1% and 1.6% respectively at end-2015.

Data for the index was contributed by 93 of 109 universal, commercial and thrift banks in the Philippines and should capture a significant portion of the overall banking system.