Resurgent in 2025

THE real estate industry's focus on certain macroeconomic factors such as gross domestic product (GDP) growth, the elevated interest and inflation rates and their effects on the property market, such as real estate values and real estate loans, has gained much attention at the start of the third quarter of (3Q) 2024. Notably, the first cut on benchmark interest rate was expected in 3Q 2024. Thus, when the Monetary Board finally lowered the overnight repurchase rate by 25 basis points last Aug. 15, 2024, it was well-received and taken as a positive signal of the industry's further recovery. The graph at the end of the article explains theimpact of the interest rate cut, along with other economic indicators, on the real estate market.

Graphically, it can be observed that residential real estate has an inverse correlation with interest rate (i.e., as interest rate goes up, residential real estate loan growth goes down and vice-versa). Homebuyers are sensitive to mortgage rates. A commercial real estate loan, on the other hand, has a direct correlation with GDP growth, more pronounced for the period 2019 to 2023. It shows that higher GDP growth has led to an increase in commercial loans growth during this period. Computationally, using the Pearson correlation coefficient, however, both residential and commercial loans have an inverse relationship with interest rate (-0.24 for residential and -0.15 for commercial), and both have a remarkably high negative correlation against inflation: -0.64 for residential and -0.76 for commercial loans. Simply put, as inflation goes up, real estate loans growth decelerates, which is a logical result of higher home prices (due to higher construction costs) dampening real property demand. Also, higher costs will make consumers prioritize basic commodities, and lower priority is given to property investments. Interestingly, one of the mechanisms of the Bangko Sentral ng Pilipinas (BSP) to control inflation is benchmark interest rate. In times of rising inflation, as seen starting 2021 until 2023 in the graph, benchmark interest rate is increased to reign in the economy and dampen investments to cool off employment that will, eventually, lower inflation.