This paper examines the housing consumption pattern of households in the Philippines given their socio-economic characteristics and the existing conditions in the land and housing market. Two basic issues are examined: one, how is housing adjustment and expenditure associated with income and demographic changes; and two, do housing consumption in the country suggest the presence of significant housing market imperfections or capital market imperfections? The results point to the lack of housing alternatives specifically for low-income households in the formal housing market. Housing adjustments and the path toward acceptable housing are thus constrained. Estimates of income elasticity show that for most households, an increase in income will not be spent on housing but on meeting other basic household needs. This being the case, there has to be a significant increase in income to bring about a significant change in housing conditions. In the long run, economic development may bring about the needed boost in income, however, in the short run, the government has looked into alternative forms of low-cost housing. One option is developing the low-cost rental market. Another option is finding innovative financing schemes that would allow low monthly amortization. Lastly, the government has to institute ways to effectively reduce the high cost of housing in the country.

Housing demand analysis is primarily a question of how households adjust their housing consumption given factors that place them out of equilibrium. Housing adjustments may be done by relocating to another unit, by modifying existing units, or by tenure changes. This decision depends on a number of factors, which stems from the peculiar attributes of housing as a tradeable good (e.g. location specificity, high costs viz. income), the characteristics of the households, and the way the housing market operates. The attributes of housing are inherent thus the adjustment process varies among households or across cities and countries primarily due to changes in the characteristics of households and differences in the way the housing and land markets operate within a city or country.

This investigation of housing demand focuses on the effects of income and lifecycle on housing adjustments and expenditure patterns given conditions on the land and housing market. Several issues are examined. First, how is housing adjustment and expenditure associated with income and demographic changes? Second, do housing adjustments and expenditures on housing suggest the presence of significant housing market imperfections or capital market imperfections?

The discussion proceeds as follows. Section 2 presents key characteristics of the Philippine housing market that may have a major influence on housing adjustments and expenditure patterns. Sections 3 and 4 present evidence of housing consumption using household surveys conducted from 1985 to 1997. Section 3 provides some descriptive statistics on household tenure change and housing improvements while Section 4 discusses the estimates of housing demand parameters using econometric models. In section 5 constraints on housing demand and affordability are discussed. The last section gives a summary of the results and provides some policy implications.

The Philippine housing market reveals a tremendous gap between the demand and supply of housing. At the root of this housing shortage is the fact that the majority of households are unable to pay for the cost of housing and land. The minimum housing cost of P150 thousand per unit is 3.8 times the yearly wages of unskilled laborers. Likewise, a P250 thousand unit of housing is 3.1 times the annual income of an employee earning a median income of P6,700 per month. Compare this to the standard norm in industrialized countries of 2-2.5%.

The high price of land is the major factor in the high cost of housing in the Philippines (Strassman and Blunt 1993). Grimes (1976) suggested that as an international rule, housing for low-income families would require that 100m2 of land would cost as much as GNP per capita. In Manila, however, the 1990 price (P1000/sq m) of a site outside the metropolis was 5.2 the national GNP per capita. On the outskirts of the NCR, raw agricultural land costs only P60 per sq m (0.3% of GNP) but the price rises by 2.5-3.0 times when the same land is zoned for urban use. It rises further by 5.3-6.7 times the zoned land price when such an area is developed (UNCHS and WB 1993)