The Market Monitor Minding the Nation's Business
By Nicandro Legaspi
The real-estate industry, which is enjoying its longest boom since the financial crisis of 1997, may face another collapse because of a proposal by the Department of Agrarian Reform (DAR), and supported by the Department of Agriculture, to impose a two-year ban on the conversion of agricultural lands to non-agricultural uses.
Officials of the two departments say the moratorium was necessary to establish “food security” for the country, explaining that more land for agricultural purposes means more rice and other crops to satisfy the country’s food requirements.
But experts say this is a simplistic approach to the food-security issue. They point out that modern farming techniques, such as mechanization or plantation-type cultivation could increase production and maximize land use more than what expansion of land area for planting could do.
They cite as an example Japan, a country that has much less agricultural land than the Philippines, but is self-sufficient when it comes to its food requirements.
Those behind the proposed moratorium also apparently did not consider its possible impact on other sectors of the economy, such as the real-estate industry, which is key to solving the perennial housing shortage.
Housing shortage
In July 2016, the Housing and Urban Development and Coordinating Council (HUDCC) declared in a housing summit a shortage of 5.6 million housing units. By August 2016, the backlog swelled to a whopping 5.7 million. The figure is projected to balloon to almost 12.5 million in 2030.
This means that a minimum of 2,600 homes will have to be built every day over the next six years if the new administration intends to tackle the massive housing backlog of 5.6 million units before President Duterte steps down from office.
Addressing the backlog as of 2016 will also require 43,726 to 73,044 hectares of land, depending on whether the development is vertical or horizontal. The higher end of this range, or 73,044 hectares, is twice as big as Metro Cebu (36,240 hectares) and bigger than Metro Manila (63,000 hectares).
Position paper
Four industry associations have submitted to the Office of the President a joint position paper appealing for a reconsideration of the proposal, even as the Office of the Executive Secretary is now reportedly preparing for President Duterte’s signature an executive order imposing the moratorium.
“The moratorium on land conversion will have an immediate and material adverse impact on the socio-economic situation of the country, affecting especially the poor,” the industry groups asserted in their appeal. “It is antithetical to the present administration’s declared policy on the decongestion of urban areas, the decentralization and rationalization of development in rural areas, on inclusive growth, and on the creation of wealth and employment opportunities for the masses.”
They also cited the following:
■ The moratorium would threaten the jobs of 3.5 million workers in the construction industry.
■ If the moratorium were imposed, the country would not be able to solve the housing shortage, considering the backlog of 5.7 million this year.
■ The moratorium runs counter to the administration’s policy of encouraging the construction of factories and other industries outside Metro Manila.
■ Related industries, such as cement producers and manufacturers of other construction materials with billions of pesos worth of investments, would suffer.
■ The government would face a slowdown in revenue collection because the real-estate industry, which includes giant developers, is among the country’s large taxpayers.
■ Land conversion for housing has a minimal effect on food security.
It is understandable that, under its mandate, the DAR should be vigilant against the indiscriminate and wasteful land-use conversion and should preserve productive agricultural lands.
But such a position is very different from a complete moratorium on the land-use conversion of all agricultural lands. The new leaders at DAR want to suspend for two years the processing and approval of pending or new applications for the conversion of the use of agricultural lands from agricultural uses to non-agricultural uses.
The EO, if signed by the President, would effectively impose a moratorium on the conversion of agricultural lands, including all lands previously awarded under Republic Act No. 6657, as amended, Presidential Decree or PD No. 27 and other agrarian-reform laws, as well as agricultural lands with Notices of Coverage issued by the DAR, irrigated and irrigable lands, prime agricultural lands, retention areas of the land owners that are tenanted, and agricultural lands where there are agricultural activities or are being cultivated by the farmers ,individually or collectively.
The experts say that while the government must, indeed, support the agriculture sector by implementing programs and policies to ensure food security, laws or policies on land use must consider other sectors of the economy, as well as social needs like housing.
The position paper said that any such law, rule, regulation or directive should at all times adopt a multilateral approach, and should be made in recognition of the legitimate multiple uses of land for the varied human needs in society.
Impact on real-estate industry
The proposed moratorium will slow down, if not suspend or halt development projects intended for housing, commercial or industrial purposes that are now planned to be established in originally agricultural lands.
Most affected are those planned to be established in rural areas, where lands are mostly agricultural, but are, in most cases, no longer economically feasible for agricultural purposes and are already reclassified by their respective local government units (LGU) as non-agricultural.
Due to the non-availability of lands to develop during the moratorium period, many real-estate developers and players would see a substantial reduction in their subdivision and construction projects and operations, if not totally suspend or close their operations.
Impact on jobs
Available data for the construction industry, under which most of housing activities are classified, establish how the Philippines’s construction industry has been a major source of jobs in the country throughout the years. While the international financial crisis in 2009 resulted in slow economic growth for the Philippines, including the employment sector for the same year, there was an immediate recovery in 2010 with a 14-percent increase in the rate of employment equivalent to approximately 2 million jobs. This figure constitutes 5.3 percent of the total employment for 2010 (NSCB) and in 2011, the construction industry further increased its share in employment to 5.6 percent of the total employment in the country.
For the entire economy, the construction industry is consistently among the Top 5 industries in terms of the total number of workers; from 2008 to 2011, it was second to manufacturing in the industry sector (Bureau of Labor and Employment Statistics).
The continuously increasing significance of the construction sector is most evident today with the latest Labor Force Survey results for July 2016, which shows that workers in the construction subsector made up the largest group of workers in the industry sector, accounting for 48.1 percent of workers in this sector.
The multiplier effect
The economic impact of the housing industry is not only evident in the number of workers directly employed by it. In order to address the increasing demand for housing, the industry relies on other industry subsectors for production inputs and on households for labor inputs.
The web of production interrelationships between the housing industry and the rest of the economy produces “multiplier effects” that help expand national output, household income, and employment.
A study by SHDA (Subdivision and Housing Developers Association), in partnership with the Center for Research and Communication of the University of Asia and the Pacific (CRC-UA&P), established that the total household income multiplier of the housing industry is 0.47. This means that every peso change in investment spending in the construction industry results in P0.47 worth of additional household income in the economy. Hence, a P100-million investment in the construction industry is estimated to generate P47 million in additional household income for the economy.
The study further revealed that the additional household income generated by a P100-million increase in investment spending in the housing industry corresponds to 228 additional jobs in the economy.
Based on the total household income multiplier effect, new residential construction in 2011 generated about 219,229 additional jobs. The employment multiplier effect of new residential construction in 2011 is about 7.8 percent of the total number of unemployed persons in 2011.
Impact on govt revenues
The cessation of the housing construction and development as a consequence of the moratorium will lead to billions lost in government tax revenues.
The National Tax Research Center, in its Tax Research Journal Vol. XXV.6 published in 2013, analyzed the profile of the top corporate taxpayers for the years 2009, 2010 and 2011. The NTRC documented that of the top 500 taxpayers for the years cited, an average of 11percent was engaged in real-estate activities.
In particular, the top taxpayers from the real-estate sector paid an estimated P8 billion, P9 billion and P11 billion for the years 2009, 2010 and 2011, respectively, which consistently made up almost 8 percent of the total income-tax payments of the top 500 corporate taxpayers for each year.
Due to the interdependence, taxes paid by other related industries will likewise experience an enormous decline with the enforcement of the moratorium.
For every housing project, there is an immediate increase in government income from building fees, taxes on workers’ wages, and taxes on the sale and transport of building materials.
Increased sales taxes can also be expected as workers spend their wages and the residents buy supplies and services for their new homes. In the long run, the local government will be able to generate revenue from property taxes, mortgage, and deed-transfer taxes.
Impact on land use
Data on land use as validated by the National Mapping Resource Information Authority (Namria) show that out of the total Philippine land area of 29.598 million hectares, 12.6 million hectares or 42.72 percent is agricultural land and only 664,473 hectares or 2.26 percent is built-up areas.
Thus, the Philippines does not have any shortage of agricultural lands. In fact, agriculture has the largest share in the pie with 12.6 million hectares or 42.72 percent of the country’s land area. The same data show that the country still has vast agricultural lands available that remain untapped for the production of rice and other agricultural crops.
In fact, a separate study by Creba (Chamber of Real-Estate and Builders’ Associations, Inc.) indicates that lands built-up or developed for non-agricultural uses— from time immemorial up to year 2010—have hardly made a dent in the country’s total agricultural hectarage despite all the government and private infrastructure nationwide. Built-up land coverage expanded another 1.25 percent in a span of seven years from 1.01 percent in 2003 to 2.26 percent in 2010.
Food security
The position paper cites other factors, aside from land, that affect food security:
■ Lack of improvements to existing farm-to-market roads.
■ Lack of improvements to farming and livestock techniques.
■ Lack of machineries, equipment and facilities that may be used to improve farming and agriculture.
■ Misuse of government funds available or allocated to the agricultural industry as a result of graft and corruption.
There is no definitive evidence to support the view that the growth and expansion of commercial, industrial and residential spaces are the primary reasons for the country’s poor agricultural production.
Likewise, there is no clear and compelling basis that imposing a moratorium on land use conversion is or would be a critical factor in ensuring food security.