Bubbly, but not bursting

A cyclical upturn, demographics and government policy to promote the sector as a growth engine for the economy have all played a role in the boom times seen recently in Thailand's real estate market

By KANANA KATHARANGSIPORN

The Bangkok skyline is changing as construction picks up.

The Thai property market is still riding a cyclical uptrend despite a slowdown in residential sales in the first quarter of the year, with sales expected to resume their upward climb, buoyed by rising consumer confidence.

The sales drop in the first quarter of this year was primarily due to the elimination of the government's tax incentives and transfer fees at the end of 2003. Consequently, there was a flurry of activity in the housing sector in order to beat the deadline.

The cyclical upturn and demographic factors, notably high growth in the age group between 30 and 39 years old, has helped promote property demand. As well, the Thaksin administration has provided an extra boost through its policy to promote the sector as a growth engine for related industries such as cement, steel, finishing materials, household appliances, utilities, automobiles, furniture and consumer products.

On average, the property sector accounted for 4% of gross domestic product in the period from 2000 to 2003. A positive signal of market activity can be seen in the number of housing registrations in Greater Bangkok, which rose from an average of 33,000 units per year between 1999 and 2002 to 50,594 units in 2003, according to data from the Government Housing Bank.

The figures reflect the positive impact of a government stimulus package introduced by the Chuan Leekpai administration shortly before it left office in early 2001. The package, which expired at the end of 2003, reduced the specific business tax from 3.3% to 0.11%, property transfer fees and mortgage registration fee from 2% and 1% respectively to 0.01% for both.

Lower interest rates have certainly helped. The average mortgage rate in 1998 was 15.3% and today it is around 5.7% though many lenders have been offering zero-interest financing for the first year.

Another catalyst for the market recovery was an incentive package that also began in 2001 and expired a year later. It included a tax deduction for down payments between 100,000 and 200,000 baht for new home purchases and an exemption from capital-gains tax from the sale of a home if the seller purchased a more expensive home within a year.

Home builders are busy again with flashy promotions aimed at buyers attracted by recard low interest rates.

The high-end segment led the recovery in the housing sector in 2002 and 2003, followed by the mid-price segment. For low-income earners, the government initiated the Baan Ua-arthorn low-cost housing project undertaken by the National Housing Authority (NHA) with a target of selling 600,000 units by the end of 2007.

The government also encouraged civil servants to buy houses by making available low-interest loans jointly offered by the GHB and the Government Pension Fund.

As for developers, which were hit by the domino effect after the collapse of the financial sector in the 1997-98 economic crisis, funding from financial institutions opened up again in 2001 after being frozen from 1997 to 2000. This gave them the opportunity to restart abandoned projects or develop new ones.

According to a survey by Agency for Real Estate Affairs, an independent real estate monitoring group, new development projects in 2003 were worth a total of 105 billion baht, almost double the amount in 2002.

New lending to developers, however, is being made on a more selective basis than before the economic crisis. As a result, the current debt-to-equity ratio of many developers, especially listed ones, has declined from two times or more before 1997 to a range of 0.5 to 1:1 today.

Anant Asavabhokhin, president of the country's largest developer, Land & Houses Plc, said the Thaksin administration had been the first government to really understand that the property sector served as an engine for economic growth.

"A clear picture of the recovery of the property sector became evident in 2002 while the overall market fully enjoyed an impressive turnaround in 2003, the best year for the property sector in the post-crisis period," he said.

The strong recovery over the past three years, however, has raised concerns that another asset bubble could develop.

Mr Anant is of the view that the market has not reached the point where it is overheating. He said the end of the tax breaks and moves by the bank of thailand to rein in housing credit would help ensure sustainability in the market.

Anant: 'If the market demand and supply are balanced at a stready figure of between 80,000 and 100,000 units each year, no bubble can develop'

The central bank currently restricts the amount a bank can lend a homebuyer to 70% of the house price for properties worth more than 10 million baht.

"If the market demand and supply are balanced at a steady figure of between 80,000 and 100,000 units each year, no bubble can develop," Mr Anant said.

He expects that level to be between 70,000 and 80,000 units in 2004.

Property expert Manop Bongsadadt of Chulalongkorn University agreed that the termination of the incentives and the trend toward higher interest rates should help prevent a bubble from developing.

"The upscale end of the market, especially high-end condominium owners, are the most worried about a new bubble as a large number of projects with a high selling price per square metre were launched at the end of 2003 and in early 2004," he said.

He expressed confidence that the recent establishment of a national real estate information centre run by the GHB would the best preventive measure against a property bubble.

"The property sector has grown without information available to the general public about the overall market. Buyers, developers and investors don't really know what the real supply and demand are and therefore have difficulty in ascertaining the true market conditions," he said.

Six key housing indicators are housing starts, completions, sales, transfers, the price index and housing finance, Mr Manop said.

He also warned that greed, overbuilding, overlending and speculation could result in a new property bubble.

"After the government incentives were terminated, loan interest rates should have been fixed for a longer term, say at least five years, to support housing demand because of the increased likelihood that general interest rates will rise in the second half of the year," said Mr Manop.

For every one percentage point increase in interest rates, a homebuyer's monthly repayment cost climbs 8%, he added.

Plans to change Bangkok continue to move forward, though a new zoning plan has been put on hold for one year for further study.

The new city plan, which had been scheduled to take effect in July 2004, was intended to create a better standard of living for city residents by requiring more open space and limiting construction of high-rises in narrow sois. But developers complained the rules would push up their costs and could put affordable housing in the city centre beyond the reach of many buyers.