The real estate bubble in Thailand
There are several important reasons why governments should monitor the level of real estate prices. Their growth periodically results in economic bubbles that constantly appear in real estate markets all over the world. The last well-known bubble developed in the United States in 2008 and became the start of the world economic crises. Therefore, detecting housing bubbles has become one of the main analytics' objectives.
The process of forming bubbles usually goes almost insensibly, but there is often an ever-growing demand for real estate on a certain market. Since it is difficult to define the true value in conditions of real market, we can detect bubbles only after a sudden slump in prices. Collapse that usually follows the real estate bubble, can destroy huge amounts of capital and cause a prolonged recession in the economy.
Another important aspect of the economic bubble is its interaction with an established tradition of spending. Market participants with overvalued assets tend to spend more because they feel themselves rich. Therefore, when the bubble suddenly collapses, holders of overvalued assets tend to cut down their costs as much as possible, and this leads to the slowdown of economic growth and the deepening of economic crisis.
The bubble formation may be revealed by researching the current state of the market in comparison with previous periods. But it is very difficult to predict when it bursts, because we can distinguish the beginning of a prolonged decline in prices from a short-term price fluctuation only in the process of worsening situation.
Like in most countries, housing in Thailand is often a single significant investment for households. Consequently, house price risk may become the main risk that households face (Glindro et al.). Moreover, financial institutions often use housing units as deposits.
There are two views on the current situation in Thailand's real estate market. The optimistic opinion is that the price growth is a sign of recovery from the last crisis. This group of analytics considers that pre-crisis prices were lower than their fundamental values. Also, the current situation shows that the mortgage products are becoming more available.
The pessimistic view is that real estate prices are overvalued and in the near future will face correction. This situation may be the evidence of a housing bubble.
In our opinion, the risk of forming a real estate bubble in Thailand is quite high, and it is evidenced by changes in the main economic indicators and the behavior of the participants of real estate markets of large cities in Thailand, such as Bangkok and Pattaya.
Main features of Thai real estate market today
Recently, the real estate market in Thailand has been experiencing a period of rapid development, which is influenced by the following factors.
1. Sufficiently profound effect of the flow of tourists.
2. The country has been successfully developing its economy. Thus, the demand on the home market is growing year by year.
3. The government of Thailand passed laws protecting foreign investments a long time ago. This fact contributed to an increase in the number of buyers from all over the world.
At the same time, the demand for real estate has already exceeded productive capacity of builders. Companies suffer from the lack of resources (equipment and workers) and growing prices for fuel and building materials (Kongcheep, Suwatikul). Requirements for getting permits for building also became more rigid. These factors provoke rising of dwelling prices and delays in progress of building projects.
Despite the fact that the quantity of lower-middle price property was increasing till 2013, we could observe a general trend of growing average price of a square meter.
GNI per capita (in US$) in Thailand is low in comparison with more economically developed countries. However, it is growing steadily, and this indicates that each following year Thai citizens will have more abilities for buying property (Worldbank.org).
There are several factors of demand and supply that can contribute to the growth of housing prices. And we observe the influence of the following factors in Thailand: significant increase in real income of the population, development of the mortgage and its availability, developers' expectations of larger revenues, increasing capital inflows.
The last factor may become the most destructive. A sudden halt of inflows would cause ravaging effect on the economy of Thailand. The deepening political crisis may become a cause this sudden stoppage or even outflows (Colombo).
On the chart, we see that growth of foreign inflows coincides with periods of economic crisis in 1998 and 2008. Although recent figures are not as high as in 1998 and 2007, we should also pay attention to the significant growth of GDP (during the last years it has grown almost 2,5 times) (Worldbank.org).
Thai real estate market has been growing since 2013 despite recent political problems in Thailand that continue affecting the real estate market. Difficult political situation and the growing risk of more violence on the streets of the state capital discourages potential buyers of expensive real estate in the center of Bangkok (Face-off). In the first quarter of 2014, only one project was launched in the central part of Bangkok, where the political protests were taking place (Kongcheep, Suwatikul).
Political crisis continues affecting the developers, but the situation is controversial. Many building companies have already launched new projects. But in the first quarter of 2014 their marketing activities were limited, because they were not confident in the situation on the market. Now all developers are trying to keep their prices on the level of the previous year. This pricing policy should attract new buyers (Kongcheep, Suwatikul).
A significant portion of real estate in Thailand is being purchased using the mortgage. During the past several month banks have been stricter about mortgage loans. About 25-30% of total applicants were declined. Thus, a lot of buyers cannot get credits for units of real estate, and this leads to the fact that buyers have to return them to developers (Kongcheep, Suwatikul).
Who buys?
In 2011, we could observe a local peak of demand for real estate in Pattaya. The multitude of investors from Russia, willing to buy property in Thai biggest cities and resorts caused growth in the number of new building projects. Nowadays we observe a moderate, stable growth and inflow of new buyers from India and China that show interest in Thai real estate.
For residents of Thailand, the ability to buy housing is limited by banks’ mortgage policy. Political problems in the country also force people to postpone purchasing of real estate. In addition, the number of new homes and apartments in 2013 exceeded the number of new household units (Kongcheep, Suwatikul).
The property bubble problem is the acutest in the condominium market, because this type of housing is predominant. The Bank of Thailand's recent report shows the increasing debt-service ratio (34% in 2013). This situation is compounded by the fact that nearly 62% of indebted Thai households earn about 10000 bhat and less. In the fourth quarter of 2013, Standard & Poor's published a warning about the record debt of Thai households, which could become a threat for country's banks (Colombo).
Is there a risk of a price bubble in Thai's housing market?
Research of the real estate market in Thailand, conducted in 2008, showed that the risk of the housing price bubble was low, although there were some evidences of overvaluation. At the beginning of 2008, residential mortgage debt was approximately 18.3% of GDP. Financial institutions (both public and private) were the main providers of mortgage loans for residents. The policy of Thai government led to the growth of the role of public financial institutions (Subhanij).
The statistics show that the situation on the real estate market of Thailand is significantly different from what it was a year before the crisis in 1997. However, there is an oversupply problem in the residential real estate market, and it is getting more and more serious.
Potential buyers tend to delay their decisions about purchasing real property. Political instability discourages both foreign and local buyers. In the future, this may lead to a decline in prices. It means that a growing bubble may burst in consequence of political reasons and the oversupply problem.
Works cited
Colombo, Jesse. "Thailand's Bubble Economy Is Heading For A 1997-Style Crash." Forbes. Forbes Magazine, 4 Nov. 2013. Web. 25 May 2014. <http://www.forbes.com>.
Dell’Ariccia, Giovanni, Ivan Tchakarov, and Martin Schindler. "Thailand: Selected Issues ." International Monetary Fund. N.p., n.d. Web. 25 May 2014. <http://www.imf.org>.
"Face-off." The Economist. The Economist Newspaper, 17 May 2014. Web. 24 May 2014. <http://www.economist.com>.
Glindro, Eloisa, Tientip Subhanij, Jessica Szeto, and Haibin Zhu . "BIS Representative Office for Asia and the Pacific ." Bank for International Settlements. N.p., n.d. Web. 25 May 2014. <http://www.bis.org>.
Khan, Tehmina S.. "An Eye on East Asia and Pacific." World Bank. N.p., n.d. Web. 25 May 2014. <http://www-wds.worldbank.org>
Kongcheep, Surachet, and Nukarn Suwatikul. "Bangkok Condominium Market." Colliers International. N.p., n.d. Web. 25 May 2014. <http://www.colliers.co.th>.
Kongcheep, Surachet. "Pattaya Condominium Market H2 2013." Colliers International. N.p., n.d. Web. 25 May 2014. <http://www.colliers.co.th>.
Paul, Chrystan. "Thailand's Economy Tested By Political Tensions." Forbes. Forbes Magazine, 6 Dec. 2013. Web. 26 May 2014. <http://www.forbes.com>.
Subhanij, Tientip. "Household sector and monetary policy implications: Thailand’s recent experience ." Bank for International Settlements. N.p., n.d. Web. 25 May 2014. <http://www.bis.org>.
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