Published on December 12, 2005

Oil shock, higher bank rates spark downtrend

Shake-outs in the real-estate market are never pretty. In fact, they get ugly and turn nasty when they near the bottom of a fall-out.

Anyone who lived through the 1979 and 1997-98 property crashes will recall prices falling more than 50 per cent from their peaks.

But many of today’s homebuyers are generally too green to comprehend the pitfalls of overborrowing and not being prepared for an upturn in mortgage rates or oil shocks.

Those who paid cash need not fear. They can ride out the down cycle, and banks can’t touch them. But for those fixed-income buyers who took out loans but are barely-making-ends-meet, there’s much to fear.

While the current correction in Thai properties, particularly the Bangkok luxury-condominium sector, started at the end of last year, the final blow-off has yet to come.

But make no mistake, the worst is far from over.

Ironically, the shake-out is happening at about the same time that the US real-estate market – probably one of the most overheated in the world – is undergoing its own correction.

The US housing market will see a sustained decline next year, causing a drag on the nation’s economy but falling short of triggering a recession, said a recent quarterly real-estate report by the University of California at Los Angeles.

The cool-down in the housing sector is likely to be spread over several years and will affect as many 500,000 construction jobs and 300,000 financial-sector positions, it said.

The forecast also said eight of the last 10 economic recessions were started by housing-market slowdowns.

Meanwhile, the Thai property market saw a fall in sales last September as compared with the same period last year. Inflation and higher interest rates were to blame for the fall in land sales.

A central bank report said recent growth had been relatively stable, because demand remained high for medium- and lower-priced homes.

But expensive units, especially those in trendy areas where there is clearly an oversupply, will face challenging years ahead.

Thongchai Kunakornporamut, CEO of Krungthep Land and a veteran developer, urged buyers and builders alike to exercise caution.

“Affordability”, a factor many developers disregarded and treated with impunity when they were building homes for the rich in recent years, could well be the straw that breaks the camel’s back for the industry.

“The fact is the fixed-income homebuyer forms the bulk of the market and is being squeezed,” he said.

“His travelling expenses, because he owns a car, has doubled, because fuel prices have shot up in the past year. While he paid Bt3,000 to Bt4,000 a month for petrol last year, he now has to pay Bt6,000 to Bt8,000.”

“For the middle class, that’s a lot of cash,” he said. “When you add up the higher cost of food, higher electricity bills, higher water bills, higher household expenses, most middle-income earners are having a tough time.”

Thongchai said it would be foolish not to pay attention to this trend, continuing to build homes that are out of reach for this class that is so crucial for the stability of the Thai market.

“Next year, we’re going to look at providing more practical housing projects,” said Thongchai. “We have to be realistic. Prices have to be more moderate.”

Meanwhile, Atip Bijanonda, deputy managing director of Supalai, sounded the same concerns.

“Traffic jams and higher petrol costs are forcing more working people to live closer to town and where they can use mass transit to cut down on travel expenses,” he said.

This was one reason why Supalai’s two City Home projects, with studios selling for less than Bt950,000 in the Ratchadaphisek and outer-Sukhumvit suburbs, sold well.

“Fixed-income urban workers choose reasonably priced, more practical housing, because they can save on expenses, lower their cost of living and put away some savings every month.”

For much of the 1990s up to last year, the brash motto of Thai yuppies, “Why pay less when you can pay more?” rang true, observe seasoned developers. “There’s a change coming, it’s in the air, and it would be perilous to ignore it,” said Thongchai.

Meanwhile, one fixed-income condominium buyer decided to offload her Bt3-million Soi Asoke unit after deciding that oil shocks and the trend towards consumer belt-tightening were far from over.

She said the burden of 20-year mortgage loans and unending maintenance fees were just too much.

“All I want is my 30-per-cent deposit back,” she said. “I can’t really afford to pay for it for 20 years, and I wouldn’t enjoy carrying an albatross around my neck all my life.”

Itthi C Tan

The Nation

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