Market in Depth

The Philippines' housing market is in free-fall, amidst a struggling economy

Lalaine C. Delmendo | March 26, 2021

The Philippines' decade-long housing market boom is over, with a severe  coronavirus-induced economic recession. The government's failed pandemic response has made things even worse.

The average price of a luxury 3-bedroom condominium unit in Makati central business district (CBD) plummeted by a whopping 20.2%  during the year to Q1 2021 to PHP 196,410 (US$4,042) per square metre (sq. m.), according to Colliers International. This was in sharp contrast to a 0.8% rise in Q1 2020 and its biggest y-o-y fall ever recorded. In fact, when adjusted for inflation, prices declined even more by 23.6% y-o-y in Q1 2021.

On a quarterly basis, condominium prices in Makati CBD fell by 2.5% (3.8% inflation-adjusted) in Q1 2021.

The Philippines experienced a house price boom from 2010 to 2018, with Makati CBD prices rising by 125% (77% inflation-adjusted). But with a slowing domestic economy, coupled with the US-China trade war, the housing market slowed sharply in 2019, with house prices rising by a meagre 0.9% and falling by 1% when adjusted for inflation. In 2020 the COVID-19 pandemic aggravated the situation, sending the housing market to its knees. In fact the Philippines has been ranked as the worst performing housing market in the Global Property Guide's 2020 Global House Price Survey, with Makati CBD house prices plunging by 13.2% (-16.1% inflation-adjusted) last year.

Nationwide, the house price decline is less severe. During the year to Q1 2021, the nationwide residential real estate price index fell by 4.2% (-8.3% inflation-adjusted), according to the BangkoSentral ng Pilipinas (BSP), the country's central bank. Quarter-on-quarter, the index dropped 1.6% (-2.9% inflation-adjusted) in Q1 2021. The residential real estate price index, published every quarter, is based on bank reports on residential real estate loans.

By property type:

  • For condominium units, prices fell by 1o.7% (-14.5% inflation-adjusted) in Q1 2021 from a year earlier
  • Duplex houses saw the biggest y-o-y price fall of 20.7% (-24.2% inflation-adjusted) in Q1 2021
  • For single detached/attached houses, prices rose byThe Philippines' housing market is in free-fall, amidst a minuscule 0.2% (but fell by 4.1% inflation-adjusted) during the year to Q1 2021
  • Townhouse prices rose by 8.3% (3.7% inflation-adjusted) over the same period

With continued global uncertainties brought by the COVID-19 crisis and rising political instability associated with the 2022 national elections, the housing market is expected to remain depressed this year, as potential homebuyers are expected to take a “wait-and-see” approach in the short term.

“Pandemic-induced disruptions have altered the Philippine economy and the property sector,” said Colliers International.

“The pandemic continues to hamper residential demand in both the pre-sale and secondary markets,” Colliers added. “We expect this to result in further price and rental correction.”

The Philippine economy continues to struggle in Q1 2021, with real GDP shrinking by 4.2%, marking its fifth consecutive quarter of y-o-y economic decline, according to the Philippine Statistics Authority (PSA). The reimposition of quarantine restrictions amidst the surge in infections hampered business and consumer activity.

Philippines house prices
Despite this, the government remains hopeful that it will achieve its 6.5% to 7.5% economic growth target this year, following a huge 9.5% contraction in 2020 – the biggest contraction since PSA started collecting data in 1946. Yet recently, the World Bank downgraded its 2021 economic growth forecast for the Philippines to 4.7%, from its initial projection of a 5.5% expansion.

The Philippines has the second highest number of COVID-19 cases and deaths in the Southeast Asian region.


Analysis of Philippines Residential Property Market »

Rental Yields

Philippines: yields good, though lower than in recent years

Yields in Metro Manila are exceptional, by international standards.

However transaction taxes (known as ‘capital gains taxes', but not actually such), and (if observed) official income tax rates applicable to non-resident investors, are high. You may think that it will be easy to avoid these taxes, it being the Philippines. But it ain't necessarily so. Once the local authorities have their eye on you, they won't willingly let go. Plus, the sheer bureaucracy of actually paying can be irritating.

Buying prices for condominiums are from US$2,800 to US$4,200 per square metre, considerably up on previous years. Unusually, yields are not always highest on the very smallest units, which suggests that smaller condominiums are oversupplied. It therefore makes a lot of sense to get a larger unit, since the general management cost and hassle of a larger unit is less.

The highest-yielding units that we found are 50 square metre units in Ortigas (which have gross rental yields of nearly 9%). Great! We don't have enough information to know whether these high yields apply in Ortigas to other apartment sizes.

The year before last we found that yields were surprisingly good generally on very large condominiums in Metro Manila (250 square metres), at around 9%, but this year we were not able to assemble a database of this dimension. This may be an optimal size for investment.

Read Rental Yields »

Taxes and Costs

Moderate taxes for foreigners
engaged in trade or business

Rental Income: Nonresident foreigners who are engaged in trade or business are taxed at progressive rates (0% to 35%) on their net income. Rents above PHP12,800 (US$26) per month are also liable to VAT at 12% of gross rent.

Capital Gains: Capital gains realized by nonresident foreigners from selling properties used in trade or business are taxed at the standard progressive income tax rates (5% to 32%). Taxable gains are the difference between selling price and acquisition cost of the property.

Inheritance: Non-resident foreigners pay estate tax only on property located in the Philippines at rates from 5% to 20%.

Residents: Resident citizens are taxed on their worldwide income at progressive rates, from 0% to 35%. Resident foreigners and nonresident citizens are taxed on Philippine-sourced income at progressive rates.

Read Taxes and Costs »

Buying Guide

Transaction costs can be very high in the Philippines

The total roundtrip cost of property purchase is around 4.50% to 16.25% of the property value.

For taxation purposes, properties are treated as capital assets if it is not used in trade or business, and properties are treated as ordinary assets if it is used in trade or business, such as rental property. The 6% Capital Gains Tax applies only on properties treated as capital assets and not on properties treated as ordinary assets.

It takes about 32 days to go through the nine procedures to register a property in the Philippines. Pre-selling, or the selling of units during construction, is the fashion nowadays. The buyer should be careful when buying unfinished buildings or condominiums.

Read Buying Guide »

Landlord and Tenant

Rents are paid one year in advance in Manila

The luxury rental market is generally pro-landlord. However, for the rest of the market the balance of power between landlord and tenant in the Philippines is neutral.

Rents: The parties can freely determine the amount or rent and rent increases. At the upper end of the market, the landlord receives one year’s rent in advance in post-dated cheques.

Legal System: The legal system is cumbersome. Tenant eviction can go through a long and expensive trial. In practice, the landlord’s success in evicting a tenant may depend on his influence in influencing the police (or local gang members) to apply pressure.

Read Landlord and Tenant »

ECONOMIC GROWTH

Failed pandemic response sends economy into prolonged recession

The Philippine economy continues to struggle in Q1 2021, with real GDP shrinking by another 4.2%, marking its fifth consecutive quarter of y-o-y economic decline – the longest since the Marcos era, according to the Philippine Statistics Authority (PSA). The reimposition of quarantine restrictions amidst the surge in infections is hampering business and consumer activity, particularly in Metro Manila and nearby provinces.

The government has been widely criticized for its handling of the COVID-19 crisis, with its delayed imposition of a travel ban from China during the onset of the outbreak, failure to strengthen contact tracing and mass testing, insufficient protective gear and supplies for medical frontliners, slow vaccination, as well as the lack of transparency on the Bayanihan Acts 1 and 2 relief programs.

As such, it is not surprising to know that the Philippines has ranked 52nd out of 53 economies on Bloomberg’s COVID Resilience Ranking, a global study that measures the resilience of countries to the pandemic.

Philippines gdp inflation
Despite this, the government remains hopeful that it will achieve its 6.5% to 7.5% economic growth target this year, following a huge 9.5% contraction in 2020 – the biggest contraction since PSA started collecting data in 1946. Yet recently, the World Bank downgraded its 2021 economic growth forecast for the Philippines to 4.7%, from its initial projection of a 5.5% expansion.

The economy grew strongly by an average of 6.4% annually from 2010 to 2019 – one of the fastest in the region.

The total number of foreign tourist arrivals plummeted by almost 84% to 1.32 million in 2020 from 8.26 million in 2019, according to the Department of Tourism. Likewise, tourism receipts fell by 83.1% y-o-y to PHP 81.4 billion (US$1.67 billion) last year, from PHP 482.2 billion (US$9.88 billion) in 2019.

In April 2021, unemployment stood at 8.7%, up from 7.1% in the previous month but substantially down from the record high of 17.6% in April 2020, according to figures from the PSA.

In 2020, the budget deficit increased to a whopping PHP1.37 trillion (US$28 billion), more than double the PHP660.2 billion (US$13.5 billion) shortfall in 2019, mainly attributable to government spending on coronavirus-induced relief programs such as the Bayanihan Acts 1 and 2.

As percent of GDP, the deficit was equivalent to 7.5% of GDP in 2020, sharply up from 3.4% in 2019 - and the biggest shortfall ever recorded.
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