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Published on August 17, 2007

The US housing meltdown, which we have warned about for the past two years, has finally happened.

Beginning with the sup-prime mortgage collapse two months ago, the collapse has now engulfed financial markets from New York to Japan with no end in sight.

How will this affect Thailand?

Ironically, Thai banks are better protected than those in more developed markets, because they subscribe less to questionable bonds that carry US mortgage instruments - many of which are now worthless due to defaults.

Also positive is the fact that Thailand was the tragic recipient of the worst real-estate crash in Asia during the 1997 financial crisis.

The event wiped out 62 financial institutions and 70 per cent of property firms - a disaster never felt before in the Kingdom's 700-year history.

As such Thai banks and real estate companies are far more cautious today in matters pertaining to mortgages and financing projects.

What will eventually emerge in the US property fiasco is the large amount of fraudulent practices, with predatory lenders and unscrupulous investment banks exploiting a market full of players who seemed irrationally exuberant.

So how was it that a property column in Bangkok can foretell this financial meltdown when even the US Federal Reserve was just two months ago calling the sub-prime matter "contained"?

To be fair, investment guru John Templeton two years ago made the scariest prediction of a US property meltdown. His worst-case scenario was that US property prices would lose 80 per cent of their value.

Such warnings are usually dismissed by vested interest as being wild conjectures made by "prophets of doom".

The fact is greed has a way of dimming visions. When the average home price in San Francisco, California, topped US$700,000 last year (Bt28 million when the baht was at 40 to the dollar), it did not dawn on many players that something terrible was happening.

The average American did not have much money in savings, so how could someone be paying so much money for a house?

It was clear the same insane levels of valuations that marked the Japanese property market in the 1990s was about to repeat itself. Then, the Imperial Palace in Japan was estimated to be worth more than the entire state of California.

The Japanese property bubble lasted more than 15 years. Only recently have prices recovered.

The current lessons for everyone in the Thai property market, which has also been doing overheated things lately, is really to review their own state of mind.

Even though local banks and developers are among the region's most careful, some may have forgotten the pain of the 1997 crash.

The sub-prime fallout is a good reminder that America, the superpower that delights in telling Asian economies how to conduct their financial affairs and improve on transparency and prudence, is itself unable to set a shinning example.

Worse, it shows how risk-prone US bankers are and why they and other global banks are not as safe and sound as we were led to believe.

On the ground level, many Thai developers say the current events hold valuable lessons to heed in the years to come.

For Songkran Issara who heads CID, one of the country's long established builders, the disaster should teach developers to be more responsible and exercise greater care about their markets that they are developing.

"There is always the danger of going overboard, especially in Thailand where there are too few controls. Anyone can build and often the result is a glut of housing, hotel, malls and what not."

The government, both at the central and provincial levels, do little to curb excesses, often allowing too much tourism development without matching infrastructure to support the influx of visitors and migrant workers, he warned.

In 1997, the property excesses brought down banks as well as big companies, he said. "If we ignore the dangers and the risks, the same can happen again."

For Harvard trained architect Sumeth Sukapan-potharam, who heads the Supharat group, the new generation of builders must exercise greater care to see that natural resources are not destroyed in the blind pursuit of money.

"The reason why foreign investors are keen about resort properties here is because

they appreciate the natural beauty. But once there's

overcrowding and pollution, they will look elsewhere for value." 

Itthi C Tan

The Nation