Impending Real Estate Collapse in the Philippines

The image above is the satellite image of Ondoy - the typhoon that has caused the worst flooding in the Philippines in 50 years. I would like to let you know...there's another "typhoon" that is coming and it will be worse than Ondoy. It's a financial hurricane that will wipe out real estate values and it will hurt many people. I don't want to scare you but I want you to be prepared. During this series of blogs over the next few weeks I will patiently explain why the real estate market in the Philippines will decline by first explaining to you the basics of market cycles...and we'll end the discussion with what you can do to avoid the impending disaster.


But first...who am I to make this bold...but unwelcome prediction?


Here's my track record:

1. In November 2005...in a Toastmasters' speech, I predicted the collapse of the US real estate market. In late 2006...the US real estate market imploded...and real estate values dropped by as much as 50%. I have to admit the decline is actually worse than I expected.

2. In the same speech, I predicted the collapse of the stock market, the US economy, the fall of the dollar and the unemployment rate. Every single prediction happened.

3. In a closed door seminar with my closest students in September 2007...I was asked if it was a good time to invest in Dubai because prices were going up and developments were happening left and right. My answer: NO. Do not invest. In late 2008, the Dubai real estate market collapsed...by as much as 30% in just a few months!


I don't have a crystal ball but my track record speaks for itself. The truth is...even though my record is quite impressive...it's actually very simple to make these predictions. Do you want to know how I did it?

Real Estate Market Cycles Explained

There are 4 market phases.
On the right side of the graph above...is Seller's Market Phase 1. In this phase of the market, property values increase proportional to inflation. This is the normal market. Just ignore the "CF values" above. I will explain what those are in another blog post. For now...pay attention to the shape of the curve.


In this phase of the market, it's good to buy-and-hold. Why? Because prices are going up...and even if you buy properties at market values...it's OK because over the long run, you'll be rewarded.


As more and more people realize that real estate is a good investment that tends to go up over time, more and more people buy real estate. The builders and developers can't keep up with the demand resulting in prices going up (this becomes a self-fulfilling prophecy: the attitude of the buyers is this - "I will buy real estate because the price goes up." But as more people buy real estate, the price goes up!). This results in the beginning of the Seller's Market Phase 2. People call this the HOT market. A this point, the appreciation rate is HIGHER than inflation. The media is telling people real estate is the best investment and everybody needs to jump in it.


At this stage in the market, I advice my students to SELL their properties and raise CASH. Why? Because they can use the cash to buy properties in the next 2 phases of the market.


Banks and financing institutions will follow the money. They see prices of properties going up and they become lax in their lending guidelines because they want to get in the action. The flood of cheap money will result in builders and developers building more and more properties. At some point however, they will overbuild. Slowly, sales will start to slow down because now there is more supply than demand. This signals that the peak is near.


What happens next is a the start of a vicious cycle that is the exact opposite of the self-fulfilling prophecy that happened in Seller's Market Phase 2. Some builders and developers will not be able to keep up with their inventory levels resulting in foreclosures. As more foreclosures come into the market, prices decline. To compete, the remaining builders, developers, real estate investors and home owners need to sell their properties at a lower price. When this happens, more and more inventory remains in the market resulting in more foreclosures...which in turn results in lower prices...which in turn means more foreclosures. The rate of decline is now accelerating. You are now in a Buyer's Market Phase 1. People call this the Declining Market. At this stage of the market, it's good to remain in the sidelines and only buy properties you can buy at a BIG discount (way below market value) AND properties which produce tremendous cashflows.


The same banks which was greedy and reckless in giving out loans during Seller's Market Phase 2 are now going under. They have tons of foreclosures in their books and they are becoming more and more motivated to get rid of them at ridiculously low prices. At some point, prices are going to become so low that it will attract the attention of the BIG real estate investors with BIG money who are going to buy these foreclosures in bulk. Silently, these BIG players are going to remove a lot of inventory in the system so much so that eventually, the price decline will stop as the demand equals supply.


This...ladies and gentlemen is BUYER'S MARKET PHASE 2. I call this phase the Millionaire Market Phase because if you buy as much real estate as you can...you will become a real estate millionaire. I don't care what you do...borrow the money if you can...but you need to bet the farm. If you do...you will become a millionaire several times over....even a billionaire. Henry Sy started building his SM empire of malls and mega-malls in 1983 - one of the worst times in Philippines' history. Inflation and unemployment was high...there was a lot of political uncertainty....and yet Henry Sy was buying land in the midst of widespread pessimism. And he was rewarded for going against the tide.


Now that you know the 4 market phases...it will become easy to understand why I predict the real estate market in the Philippines is going to go down. Still not convinced? In my next blog post...I will give you some "signs" or evidence that the collapse will happen.


dedicated to your success,
Trace
P.S. There are only 35 slots left in my upcoming TRQ 2.0 seminar. If you have not registered yet...click here - http://trqgold.com before seats run out.