President Rodrigo Duterte’s project to  clean up Manila Bay may be solving the decades-old problem of pollution in the capital, but it is also creating a new problem — finding suitable homes to relocate the 200,000 families living in slums around the bay. 

The growing number of Filipinos living in slum areas is a socio-economic problem that no government has been able to fix. Rapid urbanisation has not resulted in a commensurate increase in housing in the country’s major cities and nearly 9m Filipinos — around 8 per cent of the population — may now be living in slum areas. 

Mr Duterte is the latest of several Filipino leaders with a plan, but the problem is only likely to intensify as government funding comes up short and as burgeoning middle-class demand for housing disincentivises the private sector from helping. 

The shortage of suitable housing is likely to remain a blight on the government in Manila, whose large slum areas are increasingly shadowed by glitzy, new office towers and luxury apartments. 

Soon after taking office in 2016, Mr Duterte promised that no slum areas would be demolished without residents being resettled in suitable locations — an attempt to break with previous administrations, which dumped residents in rural areas without a plan. 

To that end, he signed a law last month merging two housing bodies and establishing a new cabinet-level agency intended to cut red-tape in home-building. But his bureaucratic shake-up does not address the shortage of state funding for affordable home-building, nor provide impetus for private developers who have shunned the affordable sector. 

57 licences to build

When Mr Duterte took office, an estimated 1.24m Filipino families were in need of housing. This backlog added to the 900,000 new homes needed each year until 2022, most of which need to be affordable, for informal workers in Metro Manila and urban centres such as Calabarzon, south of the capital, as well as more far-flung areas like Davao. 

Although the government has accelerated home-building during Mr Duterte’s first two years in office, the number of houses being built still falls short, hindered by slow construction. A typical 1,000-home project managed by state housing agencies takes an average of three years to complete, one year of which is spent securing 57 licences. 

The new housing agency is intended to reduce red tape and increase the chances of getting congress to allocate funding. In recent years, the inability of housing agencies to implement projects on time prompted the government to cut their budgets and channel the funds elsewhere. For 2019, the agencies were allotted just 2.8bn pesos ($53.2m), a 41 per cent cut from the previous year and less than a tenth of the funds allocated in 2016. 

However, the first few years of the new agency’s life are likely to see more money going to setting-up costs than home building. To fill the funding gap, the government has been offering more low-interest housing loans, rather than funding home-building directly. Nearly 213bn pesos in such loans was extended last year, despite budget constraints. 

Not enough juice for the private sector

The government has long relied on the private sector to solve the housing problem. From 1992 until 2015, 20 per cent of land area used for houses and 10 per cent of gross apartment area built had to be set aside for low-cost housing, with fines for developers who failed to comply. In 2016, as developers struggled, the quotas were lowered to 15 per cent and 5 per cent, respectively. 

This has not improved the situation. Demand from overseas Filipinos has prompted developers to concentrate more on building mid-cost houses and apartments. Over the past two years, Chinese buyers, thanks to Mr Duterte’s  closer ties with Beijing, have also fuelled a rise in house prices. 

High property prices mean investing in affordable housing is no longer commercially sustainable. Construction and labour costs have increased considerably, yet the state imposes a 580,000-peso ceiling on the price that affordable houses can be sold for. The Subdivision and Home Developers Association, an industry group, told FTCR that members can only make a profit at 700,000 pesos. 

Even though builders of affordable homes are exempt from paying income and sales taxes, it is no longer an attractive business. The government has proposed removing tax perks and diverting the revenues to fund its own slow-moving housing programme. Yet even if this happens, new funding is likely to be minimal. 

Alternative compliance

To help developers reach their legal quotas for building affordable housing, “alternative” compliance schemes were introduced last year, which include allowing developers to partner with local governments in separate affordable housing projects. But space for such projects is limited by the commercial incentives that currently drive land development. Another option is to entrust developer funding to the government, handing over responsibility for supplying housing. However, no mechanism yet exists to monitor how and where the funds would be spent. 

The slums of Manila and of other major cities in the Philippines will not be disappearing any time soon. 

— Prinz Magtulis, Philippines Researcher, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.