Cause and effect of the global

To explain it simply, we have to accept that most people want to invest in the highest yielding invest¬ment. Banking and financial institu¬tions may not be the best option as they charge an interest rate of about 23 per cent a year.

Thus, people choose to invest in the housing market. The yield from the housing market is about 8 per cent to 10 per cent a year and, depending on the location, the rate of return would be higher than the financial market.

From 1997 to 2006, housing prices in the US increased about 10 per cent a year.

As a result of a sharp increase in supply, many financial institutions and banks in the US launched finan¬cial instruments called mortgagebacked securities (MBS) and col¬lateral debt obligations (CDO), which were sold to local and foreign investors.

When supply exceeds demand, the result is a housingbubble burst, similar to what Asia experienced in 1997.

Declining housing prices and household income made it difficult for people to pay their mortgage instalments. Meanwhile, the credit ratings of MBS and CDO were read¬justed from AAA to CCC. Consequently, it led to mortgage delinquency and foreclosures.

The result of bubble burst has not only affected the US but has also spread to Europe and Asia, particu¬larly Japan and Korea. Most of the banks in Europe have had to consol¬idate their reserve funds to minimise the effect of the US subprime crisis.

Thai developers have to realise that cash flow is crucial to maintain their financial standing in the mar¬ket. To ensure sufficient liquidity, developers should readjust con¬struction procedures by making them shorter and faster. This will minimise inventory.

Moreover, they should also be cau¬tious in developing highend housing projects, with units worth more than Bt10 million. Lastly, all Thai devel¬opers should not forget the lessons learnt from the 1997 Asian crisis.

If we perform like we did during that crisis, we should be able to weath¬er the current subprime crisis as well.