To buy or not to buy

Property & Real Estate

To buy or not to buy

By Paul Gambles

Property prices are useful for a couple of reasons:

they help measure the health of an economy; and, a factor which is way too practical for most economists, they indicate how much you should expect to pay or receive if you’re buying or selling your home.

The beauty of property prices is that you can look at trends in one particular country, city, even area. To look

for mid-to-long-term trends, it’s also handy to analyse the global picture.

In some countries, you may get a mixed bag of data: city centre apartments may be getting more expensive, yet suburban houses may be stagnant or dropping in price. This is definitely not the case in Thailand. Everything is on the up – detached houses, town houses, condos and

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even land – and the last decade has seen a particularly strong surge.

Unsurprisingly, if you take a look around Bangkok, the fastest increase has been in the cost of condominiums – more than 80 percent since late 2008. Land has increased at a similar rate and, while experiencing much steadier rises, town houses have gone up 50 percent and detached houses 40 percent.

There’s an argument that such increases are a good thing. They encourage people to buy property, as they can make a profit a decade or two later, current homeowners are keen to sell as they can make a nice return and have to spend long periods of time in limbo looking for a buyer; and banks stay healthy as they receive steady long-term revenue. Everyone’s a winner, right?

Well, not quite. If you’re a first-time buyer, it’s expensive to get on the ladder: the price of condos may have gone up by 80 percent in the last ten years, but it’s unlikely many people’s income has. That means that buyers are borrowing heavily in order to buy a place to live. This phenomenon is reflected in Thailand’s household debt figures, which are through the roof. Equally worrying is the fact that the rate of increase in household debt is even greater to that of property prices – demonstrating exactly where the money is coming from.

The problem with such borrowing is that when substantial proportions of someone’s income is spent on loan repayments, they are not buying other goods, AKA consumption – an essential part of the economy. Instead, that money goes to the bank’s revenue entry. Most of it doesn’t get put back into the economy, as when banks give loans, they don’t actually use existing money but create new money in the form of a bookkeeping entry. Consequently, as prices go up, the more people borrow, and the banks are under little incentive to restrict the amount of borrowing, as they focus more on the profits that can be generated here and now by creating new money than the future risk of loss in the event of default.

If we didn’t know before, the global financial crisis has shown us that there is a tipping point, whereby people can no longer afford to borrow so much money and the demand in property buying drops. When that happens, it’s rarely a gradual process, as many around the world have discovered to their cost and now find themselves owing more than what their home is worth. This happens essentially because the price hike wasn’t based on any inherent increase in value on the property or increase in wealth among buyers. It was instead built on hot air and virtual money.

Thailand is far from being the only potential bubble case; in fact, it’s not even the most worrying example. The UK (no prizes for guessing London is the driving force), Canada (Toronto and Vancouver) and Australia (Sydney and Melbourne) are all, quite frankly, scary.

They all have two big bubble factors in common: sustained sharp rises in house prices and ballooning private debt. There’s no real telling when these Damocles swords will drop. Australia has been looking up nervously for years, while government policies have been putting off the inevitable in the belief or hope that they are truly the lucky country. It’s as yet uncertain as to whether Sydney’s deflation over the past few months is the precursor to a full-on burst, or whether the market is taking a breath before inflating again. One thing is for certain, the market there will drop eventually but these processes can take many years.

Both Toronto and Vancouver have seen house price index increases of over 150 percent in the last 14 years, whilst the amount of Canada’s household debt has gone up at a similar rate. The government has tried to let some air out gently by issuing limits on foreigners buying property, but that is only a tiny part of the problem. The issue is how easily banks lend the money in the first place.

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Date: UK Land Registry & BIS, graph by MBMG Investment Advisory

The UK has a long history of boom and bust – the full story is covered in Reinhart and Rogoff ’s ‘This time is different: Eight Centuries of Financial Folly’. For shorter attention spans, the book ‘Can we avoid another financial crisis?’ by Steve Keen details the debt explosion that began with Margaret Thatcher’s adoption of Milton Friedman’s ideologies and has been continued to a greater or lesser extent ever since. As you can see in the chart, London is right back on track for yet another bubble burst – its first since 2008-2009.

What happens in different places around the world could easily influence what happens here in Thailand. That didn’t happen so much last time around, as much financial house cleaning had already been done by the Tom Yum Goong crisis in 1997. However, this time around, the price boom and household debt figures are more susceptible to being hit hard.

So, if you’re looking to buy in Thailand, there are two big questions. Firstly, will you hit the market on the crest of a wave, or is it worth waiting for a dramatic drop? Secondly, how long did you intend to keep the property for: is it somewhere to leave or somewhere to rent pending a sale at profit? The answers to these will decide your strategy of if, where and when to buy although in general it probably remains the fact that second hand property in Thailand trades at such a discount to new builds is perhaps an indicator that selling well in Thailand can be more difficult than buying well. Yields often still offer

a premium above the rate of inflation but in Thailand banks charge relatively wide margins on loans, making property rental income even more attractive for cash buyers than for borrowers than is the case in most other location, location, locations!

But is this a good time to buy? Unfortunately, there’s no bell to indicate the top or bottom of a market, so you’ll have to weigh up the pros and cons in line with your own motivation to buy although, in some sectors, the amount of new inventory that is being developed could perhaps be taken as a warning sign.

Paul Gambles is Managing Director, MBMG Investment Advisory, Bangkok. Paul is also licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.

MBMG Investment Advisory Co., Ltd. 75/56 Ocean Tower2, 26th Fl. Soi Sukhumvit 19 (Wattana), Klongtoey Nua, Wattana, Bangkok 10110

For more information and to speak with our advisor, please contact us at info@mbmg-investment.com or call on +66 2 665 2534.

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