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High transaction costs, rent control linked to RP slums

By Tessa Salazar
Inquirer
First Posted 01:35:00 06/30/2007

Filed Under: Housing & Urban Planning

MANILA, Philippines -- The Philippines is the only country -- other than Taiwan -- in East Asia with a rent control law. Rent control and high transaction costs tend to discourage property owners from participating in the market, leading to lower supply.

If households cannot buy or rent housing due to prohibitive costs and lack of options, they may turn to self-built houses, or worse, illegally built houses on lots owned by other entities (squatting).

Transaction costs

This, in effect, is what studies from the Global Property Guide indicates, adding that the Philippines has one of the highest transaction costs in property purchases in Asia.

GPG says countries with high transaction costs tend to have expensive houses and large slum populations. ?The Philippines comes out bottom-of-class in the entire region.?

Prince Christian R. Cruz, GPG senior economist, says ?round-trip? transaction costs include all the costs involved in the property sale-purchase transaction, presented as percent of property value. The sale and purchase of property involves many costs: registration, real estate agent fees, legal fees, and sales and transfer taxes.

Total round-trip transaction costs in the Philippines can reach up to 35 percent of property value, these costs include VAT (12 percent), capital gains tax (6 percent), agent?s commission (5 percent), documentary stamp (1.5 percent), local deed tax (0.5 - 0.75 percent), legal and notary fees and other incidental costs.

More room for corruption

There are eight procedures in registering property in the Philippines, described by Global Property Guide as ?the most cumbersome in East Asia.?

?In addition, payments must be made to three different offices: the Register of Deeds for the registration fee, the BIR for all the taxes and the City or Municipal Treasurer?s Office for the transfer tax. With each office and payment, there is always room for corruption and extortion.?

Based on a survey by UN-Habitat, there were 20 million slum dwellers in the Philippines in 2001. This represented about 44 percent of the country?s urban population. There are no exact figures on the number of slum dwellers in Metro Manila. Slum areas in the national capital region are scattered all over the metropolis.

Recommendations

The GPG study provides several recommendations for the improvement of real estate markets in Asia, Cruz says. For the Philippines, the recommendations include:

? The establishment of a one-stop-shop for property registration and payment of taxes;

? Centralization of property valuation records held by the BIR, city and municipal treasurer?s offices, banks, Register of Deeds and other agencies;

? Establishment of a standard property valuation system;

? Creation of a website for all the necessary data for the real estate market; and abolition of the rent control law (the government should instead provide a standard contract for rental agreements).

Complex Metro Manila

Cruz says the problems of Metro Manila?s real estate market are more complex than other countries. The population density of Metro Manila is higher compared to other Asian cities.

Metro Manila?s 11 million people are governed by 17 mayors, compared to Singapore?s 4.5 million governed by one prime minister.

Cruz laments that Metro Manila lacks central planning of its housing, transportation and infrastructure systems. In addition, conflicts between city mayors often hinder the smooth implementation of projects.



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