Condo bubble danger ahead?

As foreign capital flowed into Thailand recently, many feared stock & real estate prices were far above true value, a bubble ready to burst...

A bubble about to burst.

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Click button to listen to Part 2: Condo Bubbles download 

REAL ESTATE

City condo buyers must proceed with care

19/06/2013
Sutapa Amornvivat

A traffic light shines in just one of three colours. But Bangkok's condominium market has hundreds of intersections, and at any given time, some lights are green, some yellow, others red. So if you are shopping for a condominium, or already own one, or work in banking or real estate, it's worth trying to view the big picture, to judge how the city's traffic now flows.

As it happens, condo unit prices have risen continuously during the past five years, at an average annual rate of 9%.

This increase is especially significant because prices for townhouses and single detached houses have merely tracked inflation during the same period. That disparity has generated concern among some economists and real estate pundits about a potential bubble in condominium prices.

In theory, a prolonged period of easy money fuels apartment price rises. Low interest rates have given potential homebuyers higher purchasing power because they have lowered the cost of monthly mortgage payments.

So many former renters have opted to buy. If this is prolonged, however, the low interest-rate environment can pump up speculative demand, potentially risking a bubble.

Should we start worrying about a bubble? After all, overinflated asset prices can harm not only one's personal financial health but also that of the whole economy.

Still visible here and there on Bangkok's skyline are skeletons of several buildings taken off life support after the property market bubble burst in 1997. But instead of flying into a panic, we need to carefully evaluate the situation at hand.

Let's start with, "What exactly is a bubble ?"

There is no standard definition, but it might reasonably be described as a situation where asset prices are disconnected from their fundamental value.

Fundamental value, in turn, is determined by three factors: supply, demand and realistic expectations about future prices.

In a bubble, rising prices induce speculation, which further inflates demand. The cycle continues until the bubble bursts. Owners rush to sell, causing prices to collapse.

As for condo prices, one way to assess fundamental value is to compare prices with historical rents. Rents reflect how much people value housing units for use without the benefit of future price appreciation.

The price-to-rent ratio, which is the property's purchase price divided by annual rent, is akin to the price-earnings ratio, or P/E ratio, that is the key to valuing shares in the stock market. The price you pay for a stock should reflect current corporate earnings and reasonable expectations about future earnings. The same is true for a home. A condo's price has reached bubble level when its price far exceeds what could be reasonably justified in terms of its rental income stream

With the current condo price situation in mind, we at SCB Economic Intelligence Centre (EIC) went on the hunt for better data, surveying about 500 condos in the Bangkok area in April.

The results show that the price-to-rent ratio for a one-bedroom unit is now around 17.1.

The likely good news is that this ratio appears to be consistent with what theory suggests is appropriate based on interest rates, tax benefits for homeowners, depreciation and maintenance costs, and potential price appreciation. But without historical data on prices and rents that would allow us to compute a "bubble benchmark" ratio, namely from 1997, we cannot be completely certain. For now, the 17.1 ratio is a green light, but it needs to be closely watched. 

Looking beyond prices however, there is some early yellow-light flashing on speculative buying. Current market conditions are encouraging players to buy condo purchase rights and sell units for profit without moving in. It typically takes only a 10% down payment to reserve a unit before construction. Assuming 10% price appreciation, that means a speculator can earn a return of up to 70% on the payment by flipping the unit before construction is completed in a few years. Developers are aware of this speculative buying, which encourages them to pump up their prices. This can set a vicious cycle in motion.

Another yellow signal comes from a look at household incomes. Housing unit purchases have grown faster than the growth in the number of households able to afford a house, based on data from the National Statistics Office's household socio-economic survey.

Half of the housing unit purchases are condos; a household is considered able to afford a house if its monthly income is at least 2.5 times the amount required to service mortgage payments, which is based on average housing unit prices and interest rates. So it appears that more and more people have been buying Bangkok condos for purposes other than using them as primary places of residence

These two yellow signals are consistent with the EIC's study of data from the National Credit Bureau, which indicates the number of individuals in Bangkok having multiple mortgages rose significantly in 2012. The number of individuals having four or more mortgages - a clear sign of speculation - shot up more than 20% during the year.

Yet these people with four or more mortgages represented only about 1% of all people with housing loan accounts in Bangkok. This suggests that speculative activity in condos is still limited.

Given these signs of speculation, what do banks say about mortgage lending quality? Data from the Bank of Thailand on loan delinquency ratios among both developers and individuals have not shown any unusual acceleration so far. The BoT data do indicate that among buyers of new Bangkok condo units worth over 500,000 baht, the debt service coverage ratio (DSCR), defined as monthly income divided by debt-servicing expenditure, has declined slightly in the past three years. But even for low-income households, the DSCR is still above 2 - the minimum lending rule among commercial banks.

So bank data show that businesses and households currently have little trouble paying off debts, which is not surprising. After all, the economy has been growing robustly; the job market is strong, and interest rates are low. But if growth slows, households might experience a cash-flow shock. This would increase delinquencies, hamper access to credit and hurt the economy. Also, the financial market turbulence and the resulting declines in stock prices could hurt consumer sentiment through negative wealth effects. That would probably lower the propensity to invest including purchases of real estate, which could leave supply unsold.

All in all, the case for a significant condo price bubble at present is weak, although there are some early signals of speculation. The situation is certainly not as bad as in Hong Kong where residential property prices have increased 120% since 2008, buoyed by a tide of incoming foreign capital. It has not yet warranted macro-prudential measures such as a requirement for banks to lower the loan-to-value (LTV) ratio from the current practice of 90% or a requirement that banks increase their reserves.

But vigilance is due, especially because interest rates might decline further. It's a good sign that banks have begun to exercise more caution in mortgage lending. In April, for example, commercial banks approved significantly fewer housing loan accounts than in the months previously.

What's especially needed is more data so that it is easier for everyone to spot a bubble before it starts to develop. This information needs to be collected by government agencies overseeing the property and financial sectors. These data series would help inform the public of the traffic lights so they could better navigate the condo market. Safe driving, everyone.

Dr Sutapa Amornvivat is chief economist and executive vice-president at the Economic Intelligence Centre, Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT.

eic@scb.co.th EIC Online: www.scbeic.com

(Source: Bangkok Post, REAL ESTATE, City condo buyers must proceed with care, 19/06/2013, Sutapa Amornvivat, link


Real Estate Vocabulary

real estate - บ้านและที่ดิน (See Wikipedia)

condominium  - an apartment building where the apartments are owned by individual people and common facilities such as hallways, heating system, elevators, exterior areas is controlled by the association of owners and paid for by an annual  fee คอนโดมิเนียม (See Wikipedia)

condominium market

Bangkok's condominium market

condo - Same as "condominium"
condo unit
condo buyers
city condo buyers

bubble - an economic bubble; an situation in markets and economies that cannot last in which asset prices (stocks, real estate) rise very quickly and many people make a lot of money, but eventually the prices fall to the true long-term value of the assets ฟอง  เศรษฐกิจฟองสบู่ (See Wikipedia)

real estate bubble - (See Wikipedia)
property market bubble -
Same as "real estate bubble"
stock market bubble - (See Wikipedia)

burst - when the bubble breaks or explodes and all the air leaves the bubble ระเบิด, โพล่ง, แตก
bubble burst
the property market bubble burst in 1997.

proceed - to continue as planned ดำเนินการ
proceed with care - to be careful while doing something

city condo buyers must proceed with care

traffic - the number traveling to a place during a period of time (people, aircraft, ships, trains, cars, trucks, etc.) ความหนาแน่นของจำนวนคน หรือยานพาหนะในช่วงเวลาใดช่วงเวลาหนึ่ง
traffic flows

traffic light - ไฟจราจร
intersection - สี่แยก, จุดที่ทาง 2 สายมาบรรจบกัน
a traffic light at an intersection

the big picture - looking at the whole situation and seeing what is important (not getting to distracted with the details)

A traffic light shines in just one of three colours. But Bangkok's condominium market has hundreds of intersections, and at any given time, some lights are green, some yellow, others red. So if you are shopping for a condominium, or already own one, or work in banking or real estate, it's worth trying to view the big picture, to judge how the city's traffic now flows. so whja

risen continuously

annual - happening once a year ประจำปี
rate -  อัตรา
an average annual rate of 9%

As it happens, condo unit prices have risen continuously during the past five years, at an average annual rate of 9%.

significant - important สำคัญ
especially significant

tracked - follow closely
inflation - the level of prices rising in the economy as a whole ภาวะเงินเฟ้อ
prices tracked inflation - prices followed inflation , prices moved along with inflation

This increase is especially significant because prices for townhouses and single detached houses have merely tracked inflation during the same period.

disparity - a big difference between two things
the disparity between condo and house prices

generated - created
concern - a worry ความกังวล
generated concern - made people worry

potential - possible ความเป็นไปได้
potential bubble
a potential bubble in condominium prices

pundits - people who share their expert advice with the public in some way (on TV, in newspaper, etc)
real estate pundits

That disparity has generated concern among some economists and real estate pundits about a potential bubble in condominium prices.

prolonged - continuing for a long time ยืดเวลาออกไป
easy money - when the supply of loans and money (money supply) is increasing in an economy (either due to central bank policy or foreign capital inflows)

fuels -
causes
a prolonged period of easy money fuels apartment price rises

theory - one or more ideas that explain how or why something happens สมมติฐาน
In theory, .... - using theory (from a book) to say or predict what will happen  

In theory, a prolonged period of easy money fuels apartment price rises.

interest - payments made for the use of another's money for a period of time
principal - the amount borrowed (that interest must be paid as a fee for using)
interest rate - the percentage of the amount borrowed (principal) that must be paid as a fee for using it

purchasing power - the power of people to buy things (determined by things like income, inflation, exchange rate, etc)

mortgage - a legal agreement in which you borrow money from a bank in order to buy a house, build something, develop a piece of land, etc.การจำนอง
monthly mortgage payments

Low interest rates have given potential homebuyers higher purchasing power because they have lowered the cost of monthly mortgage payments.

opted to - chose to

So many former renters have opted to buy.

environment - situation
the low interest-rate environment

demand - people or consumers wanting to buy goods and services ความต้องการ
speculative demand

pump up - increase
pump up speculative demand

potentially - possibly เป็นไปได้ possible in the future, may happen ที่อาจเกิดขึ้นได้
potentially risking a bubble

If this is prolonged, however, the low interest-rate environment can pump up speculative demand, potentially risking a bubble.

asset
- something owned by a person, company etc., particularly money and property ทรัพย์สิน
asset prices

overinflated - with prices that are too high (prices greater than actual value of asset)
overinflated asset prices

personal -
belonging only to you (one person)
personal financial health

harm - damage ความเสียหาย
harm one's personal financial health

Should we start worrying about a bubble? After all, overinflated asset prices can harm not only one's personal financial health but also that of the whole economy.

skyline - the pattern and shape of a city's buildings seen against the sky
Bangkok's skyline

skeleton - กระดูก
skeletons of several buildings

life support -
the machine in the hospital that keeps a person alive (when their body is failing and they are about to die)
taken off life
support - what they need to continue living is taken away and they die, cease to exist

panic - a sudden strong feeling of fear and confusion ความหวาดวิตก
flying into a panic

at hand -
existing now
situation at hand  -
the situation now
carefully evaluate the situation at hand


Still visible here and there on Bangkok's skyline are skeletons of several buildings taken off life support after the property market bubble burst in 1997. But instead of flying into a panic, we need to carefully evaluate the situation at hand.

support - help, by giving money, for example สนับสนุน

Let's start with, "What exactly is a bubble ?" There is no standard definition, but it might reasonably be described as a situation where asset prices are disconnected from their fundamental value.

fundamental - very important and essential พื้นฐาน รากฐานที่สำคัญ
fundamental value

factors - one of the things that effects a situation or event ปัจจัย
it is determined by three factors

expectations - การคาดคะเน
realistic expectations

Fundamental value, in turn, is determined by three factors: supply, demand and realistic expectations about future prices.

induce - cause ก่อให้เกิด
speculation - buying an asset hoping that its price will go up and you will make money, it could go down with a loss of money, assuming the risk of loss in return for the uncertain possibility of a reward (See Wikipedia)
rising prices induce speculation

inflates demand - makes demand increase to a level that is too high (higher than actual value of asset warrants)

cycle - a series of events repeated over and over again (in the same order)
he cycle continues until the bubble bursts

rush - to move or do something very quickly รีบเร่ง, วิ่ง
owners rush to sell

collapse - falling down suddenly ล้ม พังครืน (of people and business) to fail suddenly; to suddenly be unable to continue or work correctly ล้ม (ธุรกิจ)
prices collapse

Owners rush to sell, causing prices to collapse.

In a bubble, rising prices induce speculation, which further inflates demand. The cycle continues until the bubble bursts. Owners rush to sell, causing prices to collapse.

About the author

columnist
Writer: Jon Fernquest
Position: Online Writer