Rise in mortgages poses threat, says KResearch
Even though there are no signs of bubbles yet, the rise in outstanding mortgages to individuals as a proportion of the country's gross domestic product (GDP) is likely a high risk to the country when the cycle of interest rate starts to rise, Kasikorn Research Centre has warned.
The research managing director, Charl Kengchon, said that outstanding mortgages to individuals as a proportion of GDP in 2012 was 20 per cent compared to 16.8 per cent during the 1997 crisis.
The increase in mortgage lending in the past few years was supported by the government's schemes, the mass transit and the lower interest rate unlike the situation in 1997, which was driven by the financial market. Outstanding loans for residences and services investment in real estate to GDP were 4 per cent lower than the 10.4 per cent in 1997 because developers had reduced sourcing of funds from banks.
He said consumer debt should be closely followed because the outstanding mortgages to individuals will be further increasing as many projects in the pipeline are to be transferred.
KResearch estimates that the proportion of mortgages to individuals to GDP will rise to 22 per cent in the next two years, the overall household debt to GDP could move up to 30 per cent from 24 per cent.
The household debt to GDP in the next two years will hit a record high in the country.
The situation is not serious, he said, but the country must be cautious about the ability of consumers to repay debt when the interest rate trend becomes high again in line with the global economy, he said.
"When employment in the US resumes, the Fed will end the QE [quantitative easing] and capital fund flows will return to the US again, meaning the cycle of interest rate will rise again and influence the higher financial burden of consumers, especially mortgagess," he said.
The picture of high liquidity will be changed from the role adjustment of the Fed, while infrastructure projects worth Bt2.2 trillion, which require huge lending, will curb liquidity. The factors will impact increase in interest rate, he said.
Non-performing mortgage loans were unlikely until the interest rate is increased, which would make some borrowers unable to bear the burden of the debt, he said.
The monetary policy currently reflects the worry of the Bank of Thailand, said the economist, adding that the central bank does not want to cut the rate despite the strong baht because if the rate is lowered, it will accelerate mortgage lending.
The rate reduction might not cool down funds flows much as speculators can gain profit from the upside of the currency because of the quantitative easing from the Bank of Japan and the US Federal Reserve.
The Bank of Japan is injecting US$100 billion (Bt3 trillion) per month and there is quantitative easing of $85 billion per month by the Fed.
The research house has suggested that Thai companies should focus more on investing in CLMV (Cambodia, Laos, Myanmar and Vietnam) to help sustain the baht and maintain second rank in trading volumes with CLMV.
Thailand has a production base at home, especially agricultural base, which are unable to benefit from the strong baht unlike Japan or South Korea, which are also under pressure due to their strong currencies, as both have production bases outside the countries.
CLMV has a crucial role to lure investment and the trade activities hence Thailand should speed up investment in the region because several countries, especially Japan, are expanding activities there.