REECONS WEEK 3:

BASIC ECONOMIC
BACKGROUND FOR
REAL ESTATE ANALYSIS |
MONEY, CREDIT & REAL ESTATE
BY: RAYMART E. YAP, REB, REA, EN.P.
OBJECTIVES

• To understand the impact of flow of money to the overall real estate industry
SUB-TOPICS

• MONEY, CREDIT AND REAL ESTATE

• IMPORTANT ECONOMIC FEATURES OF REAL ESTATE
MONEY
Money serves as a medium of exchange, a unit of account, and a store of value. It facilitates transactions and
enables the flow of goods and services in an economy.

• Direct Purchase: While less common for the average individual due to high values, some high-net-worth
individuals or institutional investors might purchase real estate with cash.
• Down Payments: For most homebuyers, existing money (savings, remittances) forms the crucial down payment
required to secure a mortgage.
• Inflation/Deflation: The overall supply of money in an economy (influenced by central bank policies) directly
impacts inflation. High money supply can lead to inflation, causing the cost of goods and services (including
construction materials and labor) to rise, which in turn pushes up real estate prices. Conversely, a tight money supply
can lead to deflationary pressures.
• Monetary Policy: Central banks (like the Bangko Sentral ng Pilipinas or BSP in the Philippines) manage the money
supply primarily by adjusting policy interest rates. These rates directly influence the cost of borrowing and lending.
 CREDIT
The ability to obtain goods or services before payment, based on the trust that payment will be made in the future. In essence, it's borrowed money.

•Enabler of Transactions: Credit, in the form of mortgages and other real estate loans, is the primary driver of property purchases. Most
individuals cannot afford to buy a home outright, so they rely on credit.

•Leverage: Credit allows buyers to control a high-value asset (real estate) with a smaller upfront capital outlay. This leverage can
significantly amplify returns on investment if property values appreciate, but also amplify losses if they decline.

•Credit Availability & Cost:

•Availability: When banks are willing to lend and credit standards are relaxed, it becomes easier for people to get loans, increasing
demand for real estate.

•Cost (Interest Rates): This is where "money" and "credit" intersect. Lower interest rates (a result of expansionary monetary policy or
ample money supply) make mortgages cheaper, reducing monthly payments and increasing affordability. This stimulates demand and can
lead to higher property prices. Conversely, higher interest rates make borrowing more expensive, dampening demand and potentially
leading to slower price growth or declines.

•Impact on Developers: Real estate developers also rely heavily on credit (construction loans, land acquisition loans) to finance their
projects. The availability and cost of this credit directly impact the supply of new properties
 REAL ESTATE
refers to land and any permanent structures attached to it, such as buildings. It's a tangible asset that can be used for residential, commercial,
industrial, or agricultural purposes.

Role in the Economy:

• Wealth Creation: Real estate is a significant store of wealth for individuals and nations. Appreciation in property values can significantly
boost household wealth.

• Economic Indicator: The health of the real estate market (sales volume, price trends, construction activity) is a key indicator of overall
economic well-being. A booming real estate market often signifies strong economic growth, while a downturn can signal recessionary
pressures.

• Investment: Real estate is a popular investment class, offering potential for rental income and capital appreciation.

• Collateral: Real estate often serves as the most substantial collateral for loans, particularly mortgages, influencing the amount and terms
of credit that can be extended.
THE INTERCONNECTED DYNAMIC:
Money Supply Influences Credit Conditions:
• When the central bank expands the money supply (e.g., by lowering its policy rate like the BSP's overnight reverse repurchase facility rate), it makes
money cheaper for banks.
• This translates to lower interest rates on loans, including mortgages, increasing the availability and affordability of credit.

Credit Fuels Real Estate Demand and Prices:

• Cheaper and more readily available credit encourages more people to buy homes and investors to undertake real estate projects. This increased
demand puts upward pressure on real estate prices.
• As banks issue more mortgages, they effectively create new money in the economy (a concept often referred to as "money credit"), further
expanding the money supply. This creates a self-reinforcing loop where increased credit for real estate can lead to higher property values, which in
turn can support further lending.

Real Estate Values Impact Credit and Money:

• Rising real estate values increase the collateral available to borrowers, potentially allowing them to borrow more (e.g., through home equity loans)
or at more favorable terms.
• A healthy real estate market strengthens banks' balance sheets, as their loan portfolios are backed by appreciating assets. This can make banks more
willing to lend, further boosting credit.
• Conversely, a sharp decline in real estate values can lead to loan defaults, foreclosures, and a contraction of credit, which can significantly dampen
economic activity and even trigger financial crises.
 IMPORTANT ECONOMIC FEATURES OF REAL ESTATE
1. Immobility (Fixed Location):

Feature: Land and the improvements on it cannot be moved. Its value is inherently tied to its specific geographic location.
•Economic Impact:
•Local Markets: Real estate markets are fundamentally local. Prices and trends can vary significantly even within a city due to factors like proximity to amenities,
schools, jobs, and infrastructure.
•Externalities: Positive (e.g., a new park, good school district) or negative (e.g., pollution, high crime) externalities have a direct and permanent impact on property
values.
•Supply Constraint: The supply of land in desirable locations is fixed, leading to scarcity and often sustained value appreciation in prime areas.

2. Durability and Longevity:

Feature: Buildings and land are long-lasting assets. Land is virtually indestructible, and buildings can last for decades or even centuries with proper maintenance.
•Economic Impact:
•Stock-Flow Market: The vast majority of real estate supply at any given time is the existing "stock" of buildings, with new construction representing only a small
"flow." This means market adjustments tend to be slower.
•Slow Adjustment: Supply cannot quickly respond to sudden changes in demand. Building new properties takes significant time (financing, design, construction),
leading to potential short-term imbalances (e.g., oversupply or undersupply).
•Depreciation and Renovation: While durable, buildings do depreciate and require maintenance and renovation, creating continuous economic activity in the
construction and related industries.
 IMPORTANT ECONOMIC FEATURES OF REAL ESTATE

3. Heterogeneity (Uniqueness):

Feature: Every parcel of real estate is unique due to its specific location, physical characteristics (size, layout, architectural style), and legal attributes. No two properties are exactly
alike.
•Economic Impact:
•Pricing Complexity: It's difficult to standardize pricing as directly comparable properties are rare. This increases search costs and requires expert valuation (appraisals).
•Information Asymmetry: Buyers often have less information about a property than sellers, leading to potential market inefficiencies.
•Limited Substitutability: If a buyer wants a specific type of property in a particular location, there might be very few substitutes available, giving sellers more pricing power.

4. High Transaction Costs:

Feature: Buying and selling real estate involves significant upfront and ongoing costs beyond the purchase price.
•Economic Impact:
•Costs: Include real estate agent commissions, legal fees, transfer taxes, stamp duties, mortgage origination fees, appraisal fees, and moving expenses.
•Reduced Liquidity: High transaction costs make real estate less liquid than other investments like stocks. It's not easy to quickly buy or sell without incurring substantial
expenses. This influences investment horizons.
•Discourages Short-Term Trading: The high costs make short-term speculative trading in physical real estate less viable for most, encouraging longer-term ownership.
 IMPORTANT ECONOMIC FEATURES OF REAL ESTATE

5. Capital Intensity / High Value:

Feature: Real estate investments typically require a large initial capital outlay.
•Economic Impact:
•Reliance on Credit: This necessitates heavy reliance on credit (mortgages) for most buyers and developers. Changes in interest rates and credit availability
profoundly impact the real estate market.
•Barrier to Entry: The high cost can be a significant barrier for new buyers or small investors.
•Wealth Concentration: Accumulation of real estate can be a major source of wealth, but also contributes to wealth inequality.

6. Dual Nature: Investment and Consumption Good:

Feature: Real estate can be purchased both for direct use/consumption (e.g., living in a home) and for investment purposes (e.g., rental income, capital appreciation).
•Economic Impact:
•Complex Demand: Demand is driven by both immediate housing needs and speculative investment motives, making demand more volatile and less predictable
than for pure consumption goods.
•Market Bubbles: The investment aspect can sometimes lead to speculative bubbles where prices detach from fundamental values, driven by expectations of
future price increases rather than intrinsic utility.
 IMPORTANT ECONOMIC FEATURES OF REAL ESTATE

7. Long Time Delays (Lagged Response):

Feature: It takes a considerable amount of time to plan, finance, permit, and construct new real estate supply.
•Economic Impact:
•Disequilibrium: Due to these lags, the market can be in disequilibrium for extended periods. A sudden surge in demand can lead to rapid price increases until new supply catches up
(which can take years), and conversely, an oversupply can persist for a long time.
•Boom-Bust Cycles: This inherent lag contributes to the cyclical nature of real estate markets, characterized by periods of expansion, oversupply, contraction, and recovery.

8. Significance as Collateral:

Feature: Real estate is a tangible asset with substantial value, making it excellent collateral for loans.
•Economic Impact:
•Credit Availability: It enables banks to extend large amounts of credit (mortgages) with reduced risk.
•Financial System Stability: The health of the real estate market is closely tied to the stability of the financial system. A widespread decline in property values can threaten banks'
balance sheets and lead to financial crises.
 IN THE PHILIPPINE CONTEXT:
These economic features are particularly evident in the Philippines:

• Urbanization and Scarcity: Rapid urbanization in areas like Metro Manila, Cebu, and Davao highlights the immobility
and scarcity of prime land, driving up prices.

• OFW Remittances: A significant portion of OFW remittances is directed towards real estate, underscoring its role as
both an investment and consumption good for Filipino families. This bolsters demand regardless of local income levels.

• Infrastructure Impact: Government's "Build Better More" infrastructure projects directly impact real estate values by
improving accessibility and creating new growth corridors, emphasizing the importance of location and permanence of
investment.

• Developer Activity: The long time delays in construction are visible in the multi-year timelines for large-scale
developments.The current concerns about oversupply in certain condominium segments reflect the challenges of managing
supply and demand lags.

• Interest Rate Sensitivity: The BSP's recent interest rate cut and projected easing are highly anticipated as they directly
influence the affordability of mortgages, a critical component given the capital-intensive nature of real estate.
THANK YOU!