Regarding to the Asian financial crisis in 1997, it was partially triggered by real estate bubble in Thailand before spread to others Asian countries. Today, with a strong domestic economy, low interest rate, massive capital inflows to housing market, and the rapid growth in pricing, increasing by 5-10% over the last few years, raise a concern about the possible sign of real estate bubble again in Thailand.
The foreign investment in the Thai housing market is one of the major forces pushing up the bubble-prices of condominiums in Bangkok and in the rest of Thailand. For example, foreign investors such as Hong Kong and Singapore are attracted to Bangkok for many reasons such as restrictions of their domestic markets, the attraction of the city as a holiday getaway, and the steady rise of re-sale prices. In addition, Thai people also are in the trend of buying property both to occupy and as an investment, which driven by currency and stock market volatility.
The number of new housing units hit a record high last year with a boom in condominiums, which accounted for 58 percent of the market. This year the market, which accounts for about 5.5 percent of Thailand’s GDP, is expected to contract by 2-5 percent after rising 4 percent last year. The decline has already hit developers and could impact bank as well. Moreover, Thailand’s property index has dropped 10 percent in the past three months compared to a 5 percent fall of the broader index. Thailand’s consumer confidence and housing demand dropped for a 10th consecutive month in January. As the consumer confidence has weakened, the market will see a contraction.
One of the largest developers in Thailand, Pruksa’s new booking of real estate dropped 30 percent in January as potential delayed purchases. Its net income is expected to drop by 1.85 percent over the next 12 months. In addition, Land & Houses, the largest homebuilder In the market, saw a 50 percent fall in December presales. This year, the value of booking for property units is far lower than the 20 percent rate in 2013.
The 1997 Asian financial crisis, the key conditions of was the massive foreign capital inflows into the SE Asian Tigers that created easy liquidity, which eventually lead to the distortions of real estate market prices. Moreover, many Thai real estate developers borrowed capital in the form of unhedged USD loans. As can be seen from the picture below, Thailand external debt is significantly increasing over the past 3 years.
In order to prevent the second real estate bubble, the central bank of Thailand should keep an eye on the market very closely, look for signs of speculation, and prepare measure to cope with any possible problem. Banks need to be more careful when extending credit both to developers and homebuyers. They could focused on lending to just the top few property developers, and on the retail side, they could stop offering zero-rate mortgages.