HISTORICALLY, issues in condominium supply and demand have revolved around mismatches between sizing, designs, and specifications. Today the leading issues are not so much about design or specifications, but about product pricing and unit sizing.
New condominiums in Bangkok have become unaffordable for most real buyers. To keep unit pricing lower, developers have attempted to push the envelope on size reductions and maximise the functionality of the units. Today buyers will find that the smallest bedroom units have been reduced to 25-29 square metres even for the high-end products. The space is too small to live in comfortably.
Pricing has increased more rapidly than incomes for the middle to high-end segment and we have seen loan-to-value (LTV) ratios increase as a result as banks are allowing buyers to put smaller down payments on their loans.
New downtown condominium prices have dramatically increased over the past few years at an average of 10 per cent to 12 per cent per year, with the average of high-end and above grade at Bt 280,000 per square metre. Many new units launched in prime downtown in Q3 2018 have prices of over Bt 320,000 per square metre.
In mid-town locations, prices have reached an average of Bt 100,000 per square metre, for the first time.
Buyers must now take a bigger loan and the loan will take a larger part of their income at a time when personal debt levels are already high. Some banks have lent up to 100 per cent of the property value, and according to the Bank of Thailand, some properties have been valued higher than the market value, allowing buyers to take out larger loans and receive cash back from developers. These types of marketing gimmicks and mortgage practices ultimately have the effect of over-valuing the property in the short to mid term and put the customer in a dangerous situation where they overextend themselves with long term debt to get some quick cash up front.
The announcement from the Bank of Thailand (BOT) to ask banks to tighten mortgage lending criteria in the last two weeks has shaken the market. The proposed measures will require homebuyers to make a down payment of at least 20 per cent of home value for new mortgages worth Bt10 million and up, as well as for second homes, to reduce the risk of a property bubble and most importantly to ensure the quality of loans being approved to avoid future defaults.
This has alarmed many banks and developers who fear the regulations will negatively impact the housing market and related industries as it will make it more difficult for buyers to obtain a mortgage on new properties.
The role of BOT is to take precautionary action to counter-balance activity that could lead to the deterioration of the Thailand’s financial and economic stability, even when such measures may not be popular. If we compare the BOT’s measures to other countries such as Hong Kong, where they are imposing high stamp duty, or New Zealand where they are prohibiting foreign purchase of real estate altogether, we find the current measures proposed by the BOT are not as harsh as other countries in the region.
Implementation is the important hinge point, and this new policy should not be a one-dimensional blanket regulation. Attention needs to be given to the intricacies of the market such as cut-offs for implementation that won’t halt deals already in progress. Specific cases need to be analysed as well, such as loans for single residential homes built by owners, or other specific situations where the risk of speculative gains is minimal.
While the measures may cool the market in the short term, they could benefit the market by creating a greater level of long-term buyer confidence, decreasing speculative buying, and reduce the risk of a property bubble.
It is better to have some short-term pain in return for the long-term gain of market stability.
In October 1955, The US Federal Reserve Chairman William McChesney Martin, delivered a speech to the New York Group of the Investment Bankers Association of America. In that speech, Martin described the job of the Fed as one that requires precautionary action.
“Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up."
Effectively, this is what the Bank of Thailand is trying to do to the condominium market.
Writen by: Aliwassa Pathnadabutr, Managing Director of CBRE Thailand