Higher interest rates to impact real estate recovery

With the effects of higher interest rates on real estate markets, especially the residential sector, recent rate hikes are seen to delay the recovery of the property market.

“The aggressive contractionary monetary policy stance by the BSP (Bangko Sentral ng Pilipinas), which is in sync with other central banks, prompted by the rallying prices, may slow down the global recovery, as well as delay the expected real estate market recovery in the short term as local and global locators, assess the elevated uncertainties,” Cushman and Wakefield Philippines said in its latest Property Market News report released early October.

Last week, the US Federal Reserve approved a 75 basis points (bps) increase in interest rates as part of its efforts to bring down inflation.

In response to the US Fed’s move, the BSP announced hours later that it is set to also increase interest rates by 75 bps in its Nov. 17 Monetary Board meeting, according to news reports.

Prior to this, the BSP has raised interest rates by 225 bps this year, bringing the overnight reverse repurchase rate to 4.25 percent from an all-time low of two percent, to tame inflation and stabilize the peso.

This includes the 50 bps increase to 4.25 percent in September.

“As expected, the Fed increased its policy rate this morning (Manila time) by 75 bps. This supports the BSP’s stance to hike its policy rate by the same amount in its next policy meeting on Nov. 17,” said BSP Governor Felipe Medalla.

“The BSP deems it necessary to maintain the interest rate differential prevailing before the most recent Fed rate hike, in line with its price stability mandate and the need to temper any impact on the country’s exchange rate of the most recent Fed rate hike,” he added.

In a recent report, Colliers Philippines identified higher interest rates as one of the headwinds in the country’s residential property market due to their potential impact on mortgage rates.

“Colliers believes that developers need to be cautious with rising interest and mortgage rates, and the potential impact of a total POGO (Philippine offshore gaming operators) exodus on the secondary market. Compressing yields and costly construction materials could stifle launches across Metro Manila,” Colliers Philippines associate director for research Joey Roi Bondoc said in a report.

The professional management services firm said rising interest rates would affect the residential market, especially their potential impact on mortgage rates.

“The rising construction costs due to higher prices of imported raw materials are also likely to stifle launches in the pre-selling market,” it said.

Colliers said the decision of the central bank to raise interest rates would likely result in higher mortgage rates, citing the BSP’s latest rate hike in September.

It pointed out that average bank mortgage rates have also increased to 7.8 percent in the third quarter from 7.3 percent in the previous quarter and 7.4 percent in the same period last year.

“Colliers encourages investors to actively monitor interest and mortgage rates, particularly as these strongly influence the viability of residential investment,” it said.

It said interest rates should guide developers with their promos and payment schemes.

Meanwhile, the professional services firm said developers need to continue implementing attractive flexible payment terms given the substantial number of ready for occupancy (RFO) units in the market.

It said vacancy in the secondary residential market continues to hover above 17 percent.

“With the substantial inventory in the secondary market, developers should be proactive in offering leasing and early move-in promos for RFO projects, and we are already seeing some developers remaining aggressive in offering early move-in and rent-to-own schemes for their RFO units,” Colliers said.

It said that some developers are even allowing buyers to move-in with a down payment as low as five percent, and discounts of as much as 20 percent on total contract prices.

Moreover, Cushman and Wakefield added that the affordable and mid-market housing segments are seen to be stirred up by the higher price for borrowing as a result of the several hikes in the benchmark interest rate.

“Households forming demand in the affordable and mid-market housing segment are expected to be impacted by the real income squeezes due to high inflation levels in the short-term to mid-term,” Cushman and Wakefield said.

In an earlier report, Cushman and Wakefield said the increase in key policy interest rates and the higher level of overall prices could dent demand for residential real estate in the country in the short to medium term.

The property services firm said upward adjustments in the benchmark interest rates may also affect the level and accessibility for both retail and corporate bank financing.