Poverty... causes and effects

Poverty... ahhh.... sweet, sweet poverty. Not a day passes without a mention, a glimpse or a discussion about poverty. It causes everything and is a result of everything.

In the Philippines, poverty causes migration, corruption, starvation, prostitution, abortion, destruction, rebellion, deprivation, malnutrition, and lack of education. Further, poverty affects peace and order, the credibility of elections, the efficiency of workers, and the temperament of the president. It leads to housing congestion, squatting and urban slums. It even worsens global warming.

And what causes poverty, the same things... migration, corruption, rebellion, deprivation, malnutrition, and lack of education. The lack of peace and order causes poverty.

The idea is best captured in the Vicious Cycle of Poverty. Poor households have more children because they see them as assets that can help them escape poverty. Some say that they might be lucky that one of their children will be able to go abroad to become rich (or marry a rich spouse). They think that the more children they have the bigger the chances that one of them will become rich.

Some poor households are less fatalistic, they see their children as labor stock. More children means more workers and more money. They see their children as their pension, health insurance and disability compensation.

But alas... because they have so many children resources are stretched. Their children end up undernourished and uneducated. The entire family ends up poorer than before. The cycle of poverty comes around.

Poverty causes poverty. Because of its power to explain everything and anything, it explains nothing.

Despite all the efforts of the World Bank and the Asian Development Bank to see a world without poverty, poverty is here to stay. It is very difficult to solve poverty.

It is actually easier to escape poverty than to solve it. And perhaps, poverty is not a problem. Poverty is just a symptom of several problems.

UP School of Economics

http://www.econ.upd.edu.ph/

Wall-E, Socialism and CommercialiSM

Wall-E, the latest movie from Walt Disney, has several serious undertones despite the pretensions that it is a heart-warming comedy about a lonely robot left to clean-up the earth. Aside from the obvious warnings over the environment and laziness, the movie plays on what humans can and cannot do.

On the surface, it seems a blatant attack on consumerism and commercialization. In the future, only one company will remain and it will take over the role of the government. In marketing and industrial behavior, linkages have several advantages. Right now people withdraw money from henry sy bank to buy henry  sy items in henry sy mall. Soon, you will ride the henry sy train to go to three different henry sy malls before going home to your henry sy condominium.
 
In the movie, after the humans left the earth while a robot cleans it they live in a utopian society. Humans in the spacecraft Axiom live in complete equality, no social divisions, no countries, no races, no income classes (no work, too), and no gender (no sex, also). Everybody eats the same thing. They wear the same clothes (though you can change the color by a touch of a button). Everybody does the same thing (which is nothing). What governments failed to achieve in USSR, China, North Korea and Cuba, was done by a private company.

And for me, that was the creepy part. Humans live harmoniously and peacefully simply because they do not interact with one another. There is no poverty, no struggles. All the impossible goals of the world achieved. But in achieving these goals, people ceased to be humans.  They became huge blobs of fat, wandering off in space. They live long, uneventful lives. Life is boring but they are surviving. And as the ship’s captain said “I don’t want to survive, I want to live.”

So, the next time I feel like I want to complain, I’ll probably watch Wall-E to see how lucky I am that my life is full of challenges.

P.S.
Connecting Wall-E to housing, housing markets in socialists countries are boring subjects. The government builds housing units for everyone. People live in similar, monotonous flats except for party officials who live in bigger, more luxurious units (All pigs are equal but some pigs are more equal than others, with apologies to George Orwell). No house price cycles because people are not allowed to sell their government-issued housing units. Housing markets in capitalist societies are probably the worst, except all those that have been tried from time to time (again with apologies to Winston Churchill).

Predicting a housing market crash

Late last year, I was quoted as saying “substantial market reform would be needed to sustain the real estate boom. Though the market is positive, there are warning signs…”  These warning signs include imminent oversupply, the appreciation of the peso against the dollar and slow growth (even fall) in property lending despite the “real estate boom.”

22 Dec, 2007 2008 PROPERTY FORECAST: ‘Positive growth from OFWs, but be wary’ (Inquirer.net)
http://showbizandstyle.inquirer.net/lifestyle/lifestyle/view_article.php?article_id=108291

The positive outlook on the housing market is shared with this article.
23 Dec, 2007 Will 2007 real estate boom go on in 2008? (Manila Times)
http://www.manilatimes.net/national/2007/dec/23/yehey/top_stories/20071223top4.html

In April this year, we wrote that Asia’s housing market will likely slowdown due to the rapid increase in oil and rice prices. The Philippines is particularly vulnerable because of the warning signs I have already mentioned.

21 April, 2008 Slowdown looms for Philippines’ housing market (Business World/ GMA News)
http://www.gmanews.tv/story/90554/Slowdown-looms-for-Philippines-housing-market

When property developers announced that they were hiking their prices by 5% to 20%, I was asked again on whether the market can accommodate the increase. In the article I said “The real estate market typically goes through a cycle of rising and falling prices, it seems that we are now near the end of the house price boom.”

26 June, 2008 End to local housing boom in sight (Business World)
http://www.bworldonline.com/BW062608/content.php?id=101&src=2
full article available here http://philrealtyinfonews.blogspot.com/2008/06/end-of-local-housing-price-boom-in.html

15 July, 2008 Should one buy property now to beat price increases (Inquirer.net)
http://globalnation.inquirer.net/propertyfocus/propertyfocus/view/20080715-148542/Should-one-buy-property-now-to-beat-price-increases

Of course, real estate developers and agents disagree with my prognosis. Several articles say that the real estate market is actually doing fine. One statement even boasts that the Philippines is the hottest real estate market in the region. However, people should be able to differentiate a press release from news.

Press releases typically do not cite facts and figures. They are full of colorful and glossy statements of what may happen that will lead you to either buy the property they are selling or invest your money in their company.

Where is the housing market heading? Let me give you a run through of news from January to August.


15 Jan 2008 Property demand seen close to peak of cycle: Analysts say boom may last for 2-3 years (Inquirer.net)
http://business.inquirer.net/money/breakingnews/view_article.php?article_id=112371

25 Feb, 2008 Fil-Estate offer fails to draw enough interest (Inquirer.net)
http://business.inquirer.net/money/topstories/view/20080225-121167/Fil-Estate-offer-fails-to-draw-enough-interest

26 March, 2008 Metro Pacific ended losing streak in '07 (Inquirer.net)
http://business.inquirer.net/money/topstories/view_article.php?article_id=126420

04 April, 2008 RP Property firms look closer to home for sales (Inquirer.net)
http://blogs.inquirer.net/househunter/2008/04/14/rp-property-firms-look-closer-to-home-for-sales/

20 June, 2008 Construction cost up 20%; property firms hurting (Inquirer.net)
http://business.inquirer.net/money/breakingnews/view/20080620-143724/Construction-cost-up-20-property-firms-hurting
(note: if property developers raised their selling prices by less than 20%, it means they are absorbing some of the costs, this leads to lower revenues  and  profits)

22 July 2008 BPO space, condo glut seen (Manila Times)
http://www.manilatimes.net/national/2008/july/22/yehey/business/20080722bus1.html
(note: excellent article based on the latest Colliers Market Report)

03 July, 2008 Property stocks tumble on expected interest rate hikes (Inquirer.net)
http://business.inquirer.net/money/breakingnews/view/20080703-146196/Property-stocks-tumble-on-expected-interest-rate-hikes

04 July, 2008 Philippine properties ‘hottest’ in Southeast Asia (Inquirer.net)
http://showbizandstyle.inquirer.net/lifestyle/lifestyle/view/20080704-146540/Philippine-properties-hottest-in-Southeast-Asia

16 July, 2008 When flat is top (Opinion) (Manila Times)  
http://www.manilatimes.net/national/2008/july/16/yehey/opinion/20080716opi6.html
(note: a reaction to the news above)

29 July, 2008 Eton projects in full blast despite tough conditions (Manila Standard Today)
http://www.manilastandardtoday.com/?page=business3_july29_2008

03 August, 2008 DMCI Homes sees 11% growth in sales (Inquirer.net)
http://business.inquirer.net/money/breakingnews/view/20080803-152431/DMCI-Homes-sees-11-growth-in-sales
(note: if they raised their selling prices by 12% but sales/ revenues rose by 11%, it means they actually lost money. When adjusted for inflation, their sales actually fell. )

04 Aug, 2008 Prices of construction materials expected to rise (Philippine Star/ ABS-CBN News)
http://www.abs-cbnnews.com/storypage.aspx?StoryId=127197

08 Aug, 2008 Fil-Estate widens losses on bigger expenses (GMA News)
http://www.gmanews.tv/story/112338/Fil-Estate-widens-losses-on-bigger-expenses

Promoting Housing for All

In her 2008 SONA, GMA asked Congress to allow SSS and GSIS to increase the allowable amount of loans for housing from the current 10% limit. This is to address here earlier promise of housing for everyone.

In her previous SONAs, she talked about housing in terms of increasing the amount of loans provided by Pag-ibig, the state owned housing lending corporation. She also mentioned the number of housing units constructed and distributed by the National Housing Authority.

The government’s approach to housing is archaic, the state directly involved in the production of housing units or the provision of housing loans.  Except for the city-states of Singapore and Hong Kong where you can literally count the population, direct provision of housing by the government typically lead to disastrous consequences.

If the government intends to promote housing, the government should instead cut taxes that impede the housing market. This includes the 6% Capital Gains Tax (CGT), which is a misnomer.  In other countries the CGT is imposed on the increase in property values or capital gains. Only in the Philippines that the capital “GAINS” tax is imposed on the entire selling price.

Aside from the CGT, the seller also has to pay 5% real estate agent’s commission, 1.5% documentary stamp tax and legal fees. The buyer, on the other hand, pays for the local transfer tax (0.5% - 0.75%), registration and notarial fees and his lawyer.

Because of the prohibitive costs, a prospective seller is discouraged from selling the property unless the actual gains are enough to cover all the taxes involved in selling the property. For instance, if the value of your property rose by 15% but upon selling it you have to pay around 13% for taxes and commission, then you are left with only 2% net income. Because property owners are discouraged from selling their property, the enormous housing deficit worsens, leading to more expensive properties.  

With the costs of buying and selling properties in the Philippines among the highest in Asia, it is no wonder why there are so many homelessness people and squatters here.

Removing or reducing the 6% CGT would not lead to much tax loss anyway. According to a study in 2001, sellers report a lower selling price (by as much as 2 times lower the actual selling price) to minimize the CGT.  The resulting transparency in real estate transactions is more than enough to compensate from the minuscule tax loss. Moreover, if sellers report the real price of the property, the government will be able to collect more property taxes which are more sustainable.

There are other measures needed to promote housing including simplifying the property registration process. In the Philippines, you have to deal with 3 government offices for registration (the City or Municipal Office, the BIR and the Land Registration Authority). The process is completed in 3 months to a year depending on how much you are willing to produce for grease money. In New Zealand, you deal with only one office and the registration process is completed in two days.

To promote housing, abolish the 6% CAPITAL GAINS TAX!

P.S.
After an eternity, the proposed bill creating The Land Registration Authority passed the committee level in the House of Representatives. I wonder how many eternities we have to wait before it is enacted into a law.