The Bank of Thailand has set out measures to rein in mortgage lending after it found widespread search-for-yield behaviour in the residential market, with some banks extending housing loans exceeding the central bank's guidance.
The prolonged low-interest-rate environment led to search-for-yield behaviour in the property market, artificial demand in mortgage lending and underpricing of risks, though the country's overall financial market remains sound, central bank governor Veerathai Santiprabhob said at Fitch Ratings' annual conference.
"We will conduct a public hearing soon on mortgage lending standards to curb underpricing of risks in the market," he said.
The central bank warned earlier that it found rampant search-for-yield behaviour, especially for high-rise condo projects, and such behaviour reflects an oversupply in some areas, resulting in artificial demand and higher non-performing loans (NPLs) for mortgages.
It has already used a micro-prudential measure to inform financial institutions to tighten mortgage loan approvals as good risk management, summoning all related parties, including financial institutions and property developers, to discuss the issue.
Veerathai: Public hearing on standards
Mortgage NPLs rose to 3.39% in the second quarter, up from 3.38% in the previous quarter, according to central bank data.
The central bank's guidance is that financial institutions should not provide mortgages based on a loan-to-value ratio (LTV) of more than 95% for low-rise residential projects and 90% for high-rise ones.
A banking source who requested anonymity said the central bank discussed with mortgage lenders at the recent meeting several tentative measures, including a LTV requirement for second and third homes, as well as higher down payments for the upper residential segment.
Limiting credit lines for mortgage refinancing and demanding higher debt servicing ratios for some homebuyer segments were also discussed, the source said.
Parson Singha, senior director of financial institutions at Fitch Ratings Thailand, said that if the central bank implements macro-prudential measures to curb mortgage lending in the banking sector, it will not hurt business operations.
On the contrary, such a move could mitigate downside market risk and is a normal practice of regulators when market risks loom large, he said.
The banking sector should be able to cope with downside risks because of its limited reliance on foreign funding and sound banking buffers in capital and liquidity, Mr Parson said.
Separately, Mr Veerathai said monetary policy normalisation by central banks worldwide, especially the major economies, will continue the next few years, and market volatility will be prevalent.
Thailand's current account surplus, expected at US$35 billion this year or 7% of GDP, is a cushion for global uncertainties, he said. The central bank and other policymakers are monitoring fund inflows, Mr Veerathai said.
The impact from the US-China trade dispute is still limited, he said, but the magnitude is expected to increase next year.
Thailand's economic recovery has gathered pace over the past three quarters. The central bank forecasts the country's GDP growth at 4.4% this year, the highest level since 2008, and 4.2% next year.
Robust exports should lead to higher domestic consumption and private investment. The central bank will continue to build up the country's economic immunity to maintain positive momentum, Mr Veerathai said.
Fitch said Thailand's economy and banks should be able to weather larger global risks from rising US interest rates, though escalating trade wars could pressure global growth next year.
"Further escalation of the trade war is a threat to all open economies, including Thailand," said James McCormack, managing director at Fitch Ratings.