Bernardo M. Villegas
Recent Articles
How to Avoid More Boracays
published: Jul 31, 2017

First 1000 Days of Life (Part 2)
published: Jul 28, 2017





Articles  >> more topics
What About the Middle Class? (Part 2)

           By giving special attention to the harassed middle class, tax reforms can still guarantee sufficient revenues for the Government even while taking into account the vulnerable situation of many middle class households that are bunched together at the income range of $1.6 to $4.9 per capita per annum.  As mentioned in the first part of this article, there are 9.4 million of these households, comprising 51% of total households (about 18.5 million).  Marketing data of consumer-oriented companies will surely confirm that these households that provide a mass market of about 47 million consumers represent the massive purchasing power for all types of Fast Moving Consumer Goods (FMCG) and services, such as food and beverage, telecom and other digital services, banking and other financial services, fashion, personal care products, entertainment, education and public utilities.  Thus, despite the lower income tax rates proposed for these households, they will account for the largest portion of value added taxes imposed on consumer goods and services.  Whether or not the VAT rate is increased, these 47 million consumers will contribute an increasing share of government revenues because it is consumption that is driving the Philippine economy to be one of the fastest growing in Asia.  It must also be pointed out that even those belonging to the very poor or poor households, though exempt from paying income taxes, end up paying the VAT and sales taxes imposed on those consumer goods creatively devised by marketing savvy companies to cater to the “Bottom of the Pyramid.”  Even the smallest sachets of toothpaste or three-in-one coffee mix have VAT and sales taxes imposed on them.  It is, therefore, inaccurate to state that the poor do not contribute to the coffers of the Government.  As former Undersecretary of Finance Milwida M. Guevara wrote in one of her columns, “By restructuring the income tax rates, government will match the competitive stance of our neighboring countries.  More importantly, it will gift the taxpayers with an increase in incomes that they can take home.  They can spend more on food, books, and afford some form of leisure.”

          This discussion on the vulnerable situation of the middle class may also enlighten those who are formulating a housing policy for different income segments of Philippine households.  In a recent convention of the housing agencies OSHDP-HUDCC, I addressed the topic “Income Bracket Vs. Housing Affordability.”  Basing my recommendations on a study undertaken by Dr Winston Padojinog, specialist on housing economics and President of the University of Asia and the Pacific, I used the same data presented above.  Using the income categories in the 2009 FIES, the very poor (less than $1.0 per capita per day) amounted to 4,251,800 households.  The poor (less than $1.9 per capita) accounted for another 4,640,804 households.    The low middle income group ($1.6 to $5.0) had the largest number of households, i.e. 7,592,152.  The mid-middle ($5.0 to $13.3) represented 1,776,243 households with only 160,872 falling under high-middle ($13.3 to $26.6)  Those earning P2,200,001 and above (equivalent to $27 and above at  P45 to $1) or the rich numbered 29,653.

          Since the vast majority of the very poor (some 4.2 million households) are in the rural areas, they are not usually covered by government housing policy nor are they a target market for real estate companies.  The poor (numbering 4.6 million) or 25% of all households, are the ones who are targeted by what is known as socialized housing.  Total price of housing unit in this category is below P400,000 and the buyers  must be subsidized at an interest rate of 4.5%, with term of 30 years and loan to housing price of 100%.  With an average annual income of P78,226.72, these households are assumed to be able to pay annual amortization of P23,468.02 (about 30% of total income).  As has been suggested by Dr. Padojinog in many housing fora, even with these easy terms, the poor should not be encouraged to own their homes.  With every emergency (i.e. sickness of a member of the family, tuition payments, repairs of houses, etc.) that they face, it is practically impossible for them to allocate 30% of their income to amortization.  It is recommended that socialized housing should be provided on a rental basis. The only way for this income group to realistically afford socialized housing is for the land to be provided free by some Local Government Unit which will partner with a real estate company like PHINMA Properties to construct the housing units, as they have done in the projects called Bistekville in Quezon City or Strikeville in Cavite.  Otherwise, socialized housing units are better rented out at P2,000 to P3,000 every month, which is usually what squatters have been paying in many informal housing sites in Metro Manila and other urban communities.  Another variation that a friend of mine, Noel Gonzalez, is implementing is to put up dormitories for migrant workers in areas close to the industrial zones in provinces like Batangas, Laguna or Cavite.

          For the middle class, which combines the low and mid middle income sectors, totaling 9,368,395  households in 2009, the price range can be from a low of P400,000 to a high of P3,000,000, the interest rate  between 8.5% to 10.5% over a 30-year period and the loan to housing price ratio between 80 to 90%.  Annual amortization can be from P40,000 to P120,000.   In a study done by a team of the Center for Research and Communication (CRC), from 2001 to 2011, demand for socialized housing was estimated to be 1,143,048 million while supply was only 479,765 resulting in a deficit of 663,283.  For middle income housing (economic and low cost), total housing demand was 3,208,396 while supply was only 784,159 creating a shortage of 2,424,237 units.  An updated study of Dr. Padojinog indicated that from the period 2013 to 2030, there will be new housing needs of another 6,226,940 million of housing units for rental for the poor, socialized housing, economic and low-cost housing, implying a yearly demand of 345,941 units.  In contrast, there is already an oversupply of mid-end and high-end housing, those units costing P6,000,000 or above.  Real estate companies that have overly focused on these expensive units are shifting their marketing efforts towards foreign investors in Singapore, Hong Kong and other high-income territories in Asia as well as in the Middle East and North America.   Alternatively, some of them are refocusing their supply towards mid-income housing, shifting from town houses towards individual housing units in the suburbs of urban areas, as was done by Federal Land in the acquisition by GT Capital of part ownership of Pro-Friends that is a leading developer of horizontal housing units for the middle class, such as its Lancaster Heights and Bellefort in Cavite.

            In tandem with these real estate projects targeting the middle class are investments in educational facilities, commercial centers, public utilities, and other amenities that help the vulnerable segments of the middle class reduce the risks of falling back to absolute poverty.  The middle class will be the source of the small and medium-scale entrepreneurs who will flourish in the communities, townships and satellite cities that are being established by real estate companies shifting their attention from the very expensive units in Makati, Fort Bonifacio and Ortigas to the middle-class communities in Cavite, Laguna and Batangas and increasingly the northern provinces of Bulacan, Pampanga, Bataan and Tarlac.  Another benefit of paying closer attention to the needs of the middle class is the decongestion of Metro Manila, whose horrendous traffic problem has only one long-term solution:  the development of satellite cities far enough from the business centers of Metro Manila.  As a last word, I hope the next Administration will finally muster the political will to declare once and for all that the new international airport will be Clark.  Such a declaration will go a long way to convince many middle-income households to relocate towards the north, contributing to the decongestion of the National Capital Region.  With the international airport in Clark, a new metropolitan complex will rise in Central Luzon, making way for the decongestion of the National Capital Region.   For comments, my email address isbernardo.villegas@uap.asia.