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Thailandís Condominium Bubble a Reality or Myth
By Dr. Andrew M. Goodman

14 January 2011

The Bangkok Condominium Market

Turning now to the current market In Bangkok, and reviewing some recently released statistics, supply in terms of condominium units has increased 0.9% over the second quarter from the first quarter of 2010 and 12 % over the last year to quarter two, 2010.  This increase in supply has been accompanied by an increase in demand of only 8.1% in terms of the ‘take up’ rate on new units, year on year.  Though the future units planned asking price average has dropped slightly in the second quarter, by 1.6%, the year on year change is still a robust plus 7.8% in this indicator in terms of the planned asking price of future units.  The achieved sale price (meaning the actual price of recently sold units), is up 1% from the first quarter and 11% year on year from Quarter two last year.

We can derive a number of conclusions and some possible concerns from these statistics. The current supply growth, which outpaces demand by some 4%, would seem to be unsustainable at present price levels.  This means that the only way to bring supply back into line with demand would be to reduce the price per unit.  The current growth trends in terms of both price inflation in realized units sold and planned selling prices of future units would appear to be troublesome also.  This is the case because more and more units are being built with spiraling planned selling costs and current owners are trying to either unload their units at increased prices or rent them out to control costs.  What may in fact be happening here is that a lot of players are entering the market with a ‘buy and hope to unload before the market goes sour’ mentality.

Expert market watchers have written, in a recent analysis of the market, that there is no sign of a bubble even though 200 billion baht worth of new projects have been launched from January to November 14 of the present year involving 60,500 units.  They point to a concern not with the market itself, but rather with the Bank of Thailand’s attempt to control the over heated condominium market by lowering the loan to value ratio (the amount of the condominium purchase price that a buyer can finance) to 90% for condominiums.

This reasoning would appear to be specious: The 200 billion in additional projects taking form in a bad economy and a troubled political climate should give cause for concern and some trepidation in itself.  What is the basis for this increase in what is still a troubling economic climate?  Second, the idea that residential buyers are unable (or do not wish) to come up with a mere 10% investment out of pocket for a home should be even more troubling.  The reason behind this would seem to be that perhaps many of the buyers are not investors or even potential homeowners, they are speculators:  Speculators betting on further market gains in an already overheated market.

Recently, a respected authority in the housing market asserted that the Bangkok condominium market will continue rising and reach its peak from 2015 onward.  This was alleged to be the case because, as the ASEAN Economic Community allows more expatriates to work in the services sector in the country, they will respond by buying or renting condominiums in Bangkok. The authority feels that trade liberalization will open up opportunities for regional investors to hold more than a 70% stake in service businesses in Thailand.   The result will be more mobility of foreign workers.

One is left wondering on what basis some of these observations were made. It is not at all clear that service workers, often not highly compensated in terms of wages and benefits, will be able to afford to purchase or rent units at the presently inflated price levels. The restrictions on business laws that would require adjustments to lift possible ownership to 70% foreign control for certain service businesses, are not clearly explained. Further, even if this does happen, if the market is already overpriced, how is this going to change just because the number of foreigners involved in a given enterprise increases? Are the foreigners expected to be willing to pay inflated condominium prices? Are they exempt from the normal supply demand matrix operating in the marketplace? This does not seem to add up.

A more reasoned basis for at least some of the current cost run-ups in condominium prices is provided by those who point to a critical element of any condominium project: construction costs. Soaring building material prices pushed construction costs up by 20-30% in the first half of this year, and this has resulted in end-users and investors shopping around more for good units among buildings that have been completed or are to be completed this year.  This is because these buildings were built from a lower cost base. This in turn gives this new batch of buildings a clear edge over new projects being sold off-plan price wise. Put simply, the cost run up affects future projects and makes current projects already built cheaper by comparison.  Longer term, as construction cost increases are incorporated into the overall price structure, increases should stabilize. 

Increases that are driven by cost factors, given the above, will stabilize over time:  however, the concern is that speculator driven price increases may create a further imbalance in an already precarious market.  This could create a situation similar in kind, if not scope, to the American housing collapse driven by the issue of sub-prime mortgages in the United States.  A sub prime mortgage is a loan that is issued at a temporary lower interest rate than the market rate (often called the ‘teaser rate’) that reverts to the market rate after a fixed period of time, usually two to three years. Condominium buyers in Bangkok are also often offered two years interest only payments, or some other sort of rate gimmick to entice them to agree to the purchase.  The problem is, similar to the American housing market, often when the honeymoon time is over, the buyer finds himself unable to meet the regular payments, and seeks to dump the asset, further flooding an already over supplied market.  If this happens in large enough numbers, you get a market meltdown, as happened in the U.S. in 2008.

Other expert analysts in the market suggest a move down market from the luxury offerings may be part of the solution to the cost run-ups plaguing the Bangkok condominium market.  Developers may begin to focus on smaller units to keep the total price down.  Within this, the move may possibly be away from the very small studios to one-bedroom units. Staying out of the prime (read high cost) areas of central Bangkok may also be a part of this cost control mindset:  For example, there has recently been a significant increase in numbers of new projects launched in peripheral areas, and in many cases there were strong sales in such areas.

When one looks at the views being expressed by developers, sales agents or others engaged in moving condominiums into the hands of buyers, they appear convinced, perhaps not entirely surprisingly, that there are no inherent difficulties with the market. Often such individuals may point to a 40% run up in construction costs that have been accompanied by only a 20% price increase in recent years.  Yet statistics like these are dangerous to use in isolation as they refer to the real estate market as a whole, not just the Bangkok condominium portion.  Nobody seriously maintains that prices in the overall real estate market are out of line, so this would seem to be a moot point.  While contending that there is no indicator of a bubble,  a recent article along these lines, nonetheless points out that there has been a 48% piece of the market accounted for by condo projects relative to the whole housing market in Bangkok in terms of new projects this year, in what would seem to be evidence that may indeed contradict developers’ ‘no bubble’ thesis. 

Developers have explained this away by indicating that the market has shifted towards condominiums since 2004, and that they now take up an 85% slice of all new projects constructed.  So, over time, the total slice of the market accounted for by condominiums can be expected to increase relative to other forms of residential real estate. But this is a bit like arguing that the girl a man wants to marry will marry him because she is not engaged to anybody else. That is to say, the logic is hardly compelling! The more significant question is why the market is moving towards condominiums, and whether there are, and what type, of speculative factors may be involved in this move.

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