Photo: prd.go.th
The Thai economy is in a K-shaped recovery. Taking the symbolism further, while tourism is the arm of the alphabet, heading up, the property sector is the leg.
Tourism has come close to a full recovery, nearly achieving pre-COVID-19 foreign arrivals in the first half of the year. In comparison, the property sector has been struggling due to subdued demand, oversupply and the high mortgage rejection rate. The sector, combined with construction, accounts for around 11-15 per cent of gross domestic product, playing an important role in the local economy.
Unsold homes on the rise
Sales of new and resale residences in the first half of 2024 totalled 159,952 units, worth 452.1 billion baht, which is down 9 per cent and 9.4 per cent year on year respectively, according to the Real Estate Information Center (REIC).
This largely points to weak purchasing power of buyers, given the high household debt. As at the end of the second quarter, supply of both condominium and low-rise homes totalled 369,395 units, valued at 1.9 trillion baht — up 5.7 per cent and 24.2 per cent, respectively.
Unsold residential units totalled 313,789 units, up 7.7 per cent, worth 1.7 trillion baht.
“Considering the high numbers it would take the market about three years to absorb them, if no new projects enter the market,” said Vichai Viratkapan, former acting director-general of the REIC.
In the first half of the year, new home units were down by 4.4 per cent at 55,606, as developers became cautious about business prospects. Low-rise houses were down 14.4 per cent, but condominiums rose 11.4 per cent year on year.
Interest rate cut provides some relief
The Bank of Thailand’s Monetary Policy Committee cut the policy rate by 25 basis points to 2.25 per cent per annum on October 16. Major banks, including Government Housing Bank — the largest mortgage lender — followed suit. Although not large, the cut will benefit both small and medium-sized enterprises and individuals who have to service debts.
“It provides some relief as mortgage borrowers could reduce their monthly instalment payments by 200 baht for every 1 million baht loan. For example, if they borrowed 3 million baht their monthly payment would go down by 600 baht,” said Vichai.
Banks may also increase the loan amount by probably an extra 20,000 baht for every 1 million baht loan, he estimated.
Banks remain cautious about loan approvals as they have to take into account whether borrowers will have enough money left for living expenses after paying monthly loan instalments of around 7,000-10,000 baht for ordinary borrowers, or in a range of 3,000-5,000 baht for government officials, according to Vichai.
Need for more support
In the short run, the Bank of Thailand may relax the rule on loan to value (LTV) ratio, currently at 80-90 per cent for a second home, which forces borrowers to make larger down payments.
“Smaller down payments could boost investments from potential buyers. Many people who already own a home may want to buy additional ones in order to earn rental income,” said Vichai.
The LTV rule allows a bank to lend up to just 80-90 per cent of home value for the second home whose total price does not exceed 10 million baht, compared to 100 per cent loan for the first home.
The government is expected to consider measures to make it easier for foreigners to own homes. Vichai suggests that digital nomads be allowed to own homes. The government is looking at extending property leasing to 99 years from a maximum of 60 years currently. However, it is a politically sensitive issue as opponents are concerned about land grab by foreigners.
Looming liquidity crunch
Observers who have scrutinised the state of Thailand’s property sector are confident that the situation here is not as serious as in China where many property developers have gone bankrupt while home buyers have not got their promised homes, forcing the government to step in.
The observers, however, warn that the Thai property sector could face a liquidity crunch next year when many debentures would mature. “Some of them may not be able to roll over their debentures, leading to a liquidity problem,” said Vichai.
Samma Kitasin, an independent economist specialising in housing economics, was more optimistic about the prospects of the property sector after the rate cut.
He pointed to the story of Sena Development Pcl trying to navigate market turbulence. The SET-listed developer has come up with an innovative approach, a so-called rent-to-own condo scheme.
Potential buyers will rent the unit first, and if they keep paying the rent on time, they are offered ownership of the unit. Sena provides support for bank loan applications to buyers who have a good payment record.
What an aged society means for housing sector
As Thailand has become an aged society with the number of people aged 60 and above accounting for more than 20 per cent of the current population, the demand for homes may not be robust going forward.
Currently a large number of senior citizens and children live in rural areas while people in the working age live in large cities. “Housing in big cities will continue to expand, but it might slow down or not expand at all in smaller cities or rural areas,” said Vichai.
In the long run, Thailand might follow in the footsteps of Japan and Italy where large numbers of homes are abandoned as young people move to live in big cities. The two countries top the list of the world’s oldest populations.
