Thailand now has a house price boom too

Thailand now has a house price boom too

by Lalaine C. Delmendo

Thai house prices are now rising at a faster pace, mainly fuelled by the country’s robust economic growth.

The Thai price index for single detached houses rose by 4.63% (1.48% inflation-adjusted) during the year to end-Q1 2013, the highest year-on-year increase since Q2 2009, based on figures released by the Bank of Thailand (BOT), the country’s central bank. 

The condominium index which soared by 9.39% (6.1% inflation-adjusted) is actually a more relevant index.   Condominiums are what Bangkok people tend to live in (and foreign buyers).  The longer-established detached houses index may over-represent the rural population.

Likewise, the price of other property types and land also increased during the year to Q1 2013:

• The price index for townhouses rose by 6.86% (3.64% inflation-adjusted)
• The residential land price index increased by 4.85% (1.69% inflation-adjusted)

Property demand is rising fast. Total transactions by value, including both land and buildings, skyrocketed during the year to Q1 2013 by 35.3%, to THB219 billion (US$7 billion).  64% of all these transactions took place in the Central region.

Total outstanding property credits rose by 13.3% during the year, to Q1 2013 to THB1.86 trillion (US$59.7 billion), according to the Department of Land, Ministry of Interior. Of these credits THB1.37 trillion (US$43.95 billion) were personal housing credits, while the remaining THB490.5 billion (US$15.7 billion) were real estate development credits.

Thailand’s economy expanded by 6.4% in 2012, a sharp improvement from a meagre growth of 0.08% seen in the previous year, but still lower than the 7.8% growth recorded in 2010, according to the International Monetary Fund (IMF). The economy is projected to grow by about 5.9% in 2013.

Condominium glut

In the third quarter of 2010, there was a sharp drop in housing transfers in Greater Bangkok, because of the expiry of property tax incentives in June, according to the Real Estate Information Centre (REIC). Transfers fell 42% from the previous quarter, with a large number of transfers rushed through before the tax incentives ended.

In the same quarter, developers launched more than 23,000 condominium units onto the market to release pent-up supplies, according to the Colliers International Thailand. The launches were mainly in the low to medium end market, with reduced unit sizes, compensating to some degree for increasing land prices throughout the city.

The take-up, however, has been low, with buyers are increasingly likely to shop around before making a decision, notes Colliers. In Bangkok, take-up rate in Q3 plunged by to 51% from 77% in Q2, and 67% in Q1.

Nevetherless new condominium units near mass-transit routes will see price spikes of at least 5% in 2011, accprding to the real estate development firm Supalai Plc, due to higher construction costs and land prices. Customers will have to accept price increases as land for new condominiums in areas close to mass transit is very scarce. On the other hand, stable prices are expected for low-rise units.

Decreasing yields

The average rental yield in Bangkok is now around 6.2% in May 2010, down from around 7.2% in 2009, according to the Global Property Guide research. Higher yields are realized from condominiums measuring between 45 and 80 sq. m., with yields of around 7%.

In Pattaya, foreigners are shifting from buying residences to renting, at monthly rentals ranging from THB 50,000 to THB 90,000, according to Clayton Wade of Premier Homes Real Estate. Demand for rentals in Pattaya grew strongly when the baht began strengthening against the US dollar.

Interest rate hikes

In July 2010, the BOT raised its key interest rate to 1.5% after maintaining it at 1.25% since April 2009. The rate was further increased by 25 basis points to 1.75% in August, and to 2% in December.

There were concerns, however, about the BOT’s timing, given the weak economy in October. Baht appreciation may occur as interest differentials with the US widen, while higher costs will hit borrowers when banks follow the rates increase. However so far, the Government Housing Bank (GHB) interest rate has been constant since May 2009, at 6.75%.

The BOT explained that a negative real interest rate is inappropriate when the economy is expanding. With the key rate at 2% and inflation around 3.4%, the real interest rate is -1.4%, suggesting that further interest rate rises may occur.

BOT’s preventive measures

The BOT has released new rules in response to public anxiety that Thailand faces the risk of another property bubble, particularly in the condominium sector.

The BOT’s new rules take effect in 2011 and 2012.

• for condominium units under THB 10 million (USD330,300), bank loans must be limited to 90% of a home’s value, from January 1 2011
• low-rise housing loan-to-value (LTV) ratios are capped at 95%, starting January 1, 2012.
• for larger loans, banks must increase risk weighting to between 75% and 100% of the loan value. At present, the risk weighting is set by the BOT for the property sector at 35%.

Risk weightings are used to calculate the minimum amount of capital required to support lending. The higher the risk, the greater capital is required by banks leading to increased overall costs in the form of higher interest rates.

Still no property bubble

In fact, a bubble is unlikely in the Thai property market as prices have risen naturally in the past three years, according to the Government Housing Bank (GHB), a state-owned lending agency. GHB’s president Khan Prachuabmoh insists that there is nothing unusual in the present situation, despite the substantial recent increases in low-end supply.

Real demand, not speculative demand, exists for low-rise housing below THB 3 million (USD99,100), which accounts for 70% of the market, according to Housing Business Association (HBA) president Issara Boonyong. The remaining 30% of demand comes from investors, who buy homes to generate rental income. The 23,000 registrations of new condo units in the first nine months of 2010, compares with 29,000 registrations of low-rise residences, adds Boonyong.

Demand for residential projects is expected to grow by at least 7% in 2011 despite the BOT´s measures to control the property sector, says Thongma Vijitphongpun, chief executive officer of Pruksa Real Estate.

The new rules are unlikely to affect demand, he adds, as down payments on residential projects are usually at least 10%. This is true for both condominiums and low-rise residences.

The low-rise residence market is expected to recover after the mass transit system expands to Bangkok’s neighboring provinces including Nonthaburi, Samut Prakan and Pathum Thani, according to deputy-governor Teerachon Manomaipibul of the Bangkok Metropolitan Administration.

Demand for rental units in city condominiums continues to grow from both local and foreign tenants as returns are higher (6-10% per annum) compared to saving in a bank, since interest rates for saving deposits linger below 2%, according to Asian Property Development’s senior vice-president Poompat Sinacharoen.

Mortgage lending up!

Somewhat confirming this, the preliminary figures for personal housing credit in Q3 2010 stood at THB 1.058 trillion (USD35 billion), up by 14.7% y-o-y, according to the BOT. The strong growth may be due to the special mortgage campaign launched by the Siam Commercial Bank, the biggest mortgage lender in Thailand.

The campaign allows borrowers to pay monthly installments as low as THB 1,000 (USD33) in the first year for each THB 1 million (USD33,000) taken out, tied with a special interest rate of 1% during the period. The campaign was offered until the end of December 2010.

Outstanding mortgages were 11% percent of GDP in 2009, only a percentage point up from 2008.

Strong baht, record-low inflation

Thailand’s economy expanded by a robust 6.4% in 2012, a sharp improvement from a meagre growth of 0.08% the previous year, but lower than the 7.8% growth recorded in 2010, according to theInternational Monetary Fund (IMF). Thailand’s economy grew by an average of 5% annually from 1999 to 2007.

In the first quarter of 2013, real GDP increased by 5.3% from a year earlier, a sharp decline from the 19.1% growth recorded in the previous quarter. On a quarterly basis, seasonally-adjusted real GDP contracted 2.2% in Q1 2013, according to the National Economic and Social Development Board (NESDB). The weaker-than-expected growth in Q1 was mainly attributed to the strengthening of the Thai baht and the eurozone debt crisis. 

Thailand’s 2013 growth forecast has been revised down to 4.2% to 5.2%, from an earlier projection of 4.5% to 5.5%, by the NESDB.

In April 2013, the Thai baht hit a 16-year record high at US$1 = THB28.96, but it has since been impacted by the “Bernanke shock”.

Inflation slowed to 2.3% in May 2013, the lowest level since November 2009. The baht’s appreciation is helping contain inflationary pressures, by reducing import costs in local currency terms.   The Bank of Thailand (BOT) expects inflation to average 3.4% for 2013, down from 3.02% the previous year.  As a result, the BOT cut repo interest rates to 2.5% in May 2013, from 2.75% since October 2012.

House prices falling in Moscow and St Petersburg

Russian house prices are rising - but only just, after inflation has been taken into account, and not in Moscow or St. Petersburg. The price index for all resale apartments in Russia rose by 10.39% during the year to Q1 2013, according to the Federal State Statistics Service(Rosstat).  Adjusted for inflation this represents only a 3.05% real price rise.
In Moscow, Russia’s capital, the price index for resale apartments rose by only 6.17% y-o-y to Q1 2013. When adjusted for inflation, house prices actually fell by 0.89%.

In St. Petersburg, the country’s second largest city, the price index for resale apartments rose 5.31% during the year to Q1 2013.  When adjusted for inflation, house prices fell by 1.68%.

Russia had a massive housing boom from 2000 to 2007, with secondary market prices skyrocketing by 436% while primary market prices rose 362%.  Property prices started to weaken in late-2008, and began falling in the second quarter of 2009.

At RUB 48,795 (US$ 1,485) per sq. m. the average price of new apartments is still 7.6% down in the first quarter on the 2008 peak price, which was RUB 52,799 (US$ 1,607) per sq. m.

According to the Land Code of 2001, private ownership of land properties is allowed for both locals and foreigners. The legislation was extended to Moscow in January 2006.

Small but expanding mortgage market

Total outstanding housing loans increased 31.5% during the year-to-end Q1 2013. Around 94% of the loans were in rubles, while the remaining 6% were in foreign currency.  This reflects less an expanding property market, than an expanding mortgage market.

In the first 9 months of 2012, every fifth property (20.5%) registered in housing deals was purchased with a mortgage loan, according to the Federal Registration Service, especially on the primary market.

In 2006, laws underpinning mortgage-backed securities were introduced, allowing banks to refinance housing loans for the first time.

Key interest rate on hold

In Q1 2013, the average interest rate for ruble-denominated loans increased to 12.9%, up marginally from 12% in Q1 2012. In contrast, the average interest rate for foreign currency-denominated loans was slightly down at 9.7%, from 9.8% last year.

Russia’s key interest rate has been kept at 8.25% for ten consecutive months, after being raised from 8% in September 2012. Some longer-term rates, however, were cut, such as the one-year repo, which fell from 7.5% to 7.25%.

Rental yields are low

Moscow is the world’s 4th most expensive city to live in for expatriates, according to the 2012 Mercer Cost of Living Survey. Rent payments are commonly in US dollars or euros, payable on a monthly or quarterly basis.

In December 2012, the average rent for elite apartments with a total area of 80 sq. m. to 150 sq. m. was US$6,365 (RUB 208,225) per month, up by 0.5% from the same period last year, according to Knight Frank. Although the supply of luxury properties grew in 2012, the total primary market stock fell from 950 flats in June 2012, to 745 units by end of 2012.

Despite these very high rents, the average gross rental yield in Moscow’s upper-end areas was a meagre 3.9%, down by 0.3% on the previous year, according toGlobal Property Guide research (June 2012).

St. Petersburg apartments generate higher yields than Moscow, with an average yield of around 5.7%. The yield for 120 sq. m. apartments was lower, at 4.74%.

New laws affecting property market

In 2013, new laws expected to affect the real estate market have generated significant protests.  The proposed legislation requires foreigners and Russians to register their permanent address after 90 days of changing address. Those who fail to register will be fined from RUB 2,000 (US$ 60) to RUB 3,000 (US$ 90), which could go up to RUB 5,000 (US$ 150) in Moscow and St. Petersburg. Landlords will also pay up to RUB 7,000 (US$ 210) for every unregistered occupant residing in their properties. Fake registrations or registration of a person who doesn’t reside at a property could lead to a fine of up to 500,000 (US$ 15,000) and a 3-year imprisonment.

The Russian Supreme Commercial Court issued a legal opinion concerning landlord-tenant relations on March 21, 2013:

• A lease agreement may be entered into for future properties, it also applies to buildings whose ownership titles have yet to be registered but are already operational. If the landlord fails to hand over the premises because the building has not been constructed, the tenant may recover damages.
• If it is proven that the building or the premises are an unauthorized construction, no lease agreement may be entered into for future properties. This also includes a situation where a lease agreement is subject to a condition that the landlord will go to court to have title to the unauthorized construction facility legally recognized.

The basis for taxation of a property tax from book value (current basis) to market value of the property was supposed to be introduced last January, but the process was delayed due to continuous discussions on exemptions for various categories of property owners.

The parliament also plans to implement a RUB 1.5 million cap on tax deductions from interest paid on mortgage loans. Currently, all interest payments on mortgage loans are tax deductible.

Economic slowdown in 2013

Russian economic growth slowed in early-2013. The continued recession in the Euro area affected investments in Russia, as well as demand for its commodity exports, causing GDP to grow by only 1.6% y-o-y in Q1 2013, its weakest growth since 2009, according to the Federal State Statistics Agency (Rosstat).  GDP is expected to grow by only 2.3% in 2013, and the World Bank has cut its projection from 3.3% due to weaker than anticipated investment demand and delayed recovery in export demand. Russia’s economic growth was 3.4% in 2012.

The country fell deep into recession in 2009, with GDP contracting 7.8%, after global energy prices dropped. It was Russia’s deepest recession in 15 years, after robust economic growth from 1999 to 2008 thanks to booming energy and commodities revenues. The recession was followed by a recovery, with Russia’s GDP growing by 4.5% in 2010 and 4.3% in 2011.

Russia’s unemployment rate has fallen from over 9% in January 2010, to around 5.2% in May 2013. However unemployment ranges from 13.3% in North Caucasus Federal District, to very low rates in St. Petersburg (1.2%) and Moscow (1.6%) (Rosstat, May 2013).

Inflation was around 7.4% in May 2013, the highest rate in 21 months, driven by regulated prices and food costs, and significantly higher than the Russian central bank’s target of 5% to 6%. IMF expects inflation to slightly fall in 2013, to 6%.

Russian depositors big losers in Cyprus

Cyprus was recently granted a €10 billion bailout by the European Commission, ECB and IMF, making it the 5th country to receive a bailout. Cyprus is a tax haven for investors – mostly Russians, who own around 40% of Cyprus bank deposits.

The downfall of Cyprus’ two largest banks affected wealthy Russians, who invested their money in the country.  They are now facing write-downs of around 30% to 40% for accounts with more than € 100,000. Moody’s Investors Service (MCO) estimates that Russian individuals and companies have at least $ 30 billion in Cypriot banks. The Russian government has stated that it will not compensate Russians who have lost their money in the Cypriot financial crisis.

Cyprus received aid from Russia during the crisis, with a € 2.5 billion emergency loan to cover its 2012 budget deficit. Russia also agreed to restructure that loan in April 2013. According to Russian Finance Minister Anton Siluanov, the restructuring terms sought by Cyprus would amount to a 10% writedown of the loan. The terms of Russia’s new credit agreement with Cyprus weren’t disclosed by President Vladimir Putin.

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