Bubble trouble in Bangkok condo market?

Construction News

Nothing haunts the Thai economy like the ghost of the 1997 Asian crisis. The illusory prosperity and good times were crushed overnight, leaving behind financial wreckage and dire distress in all economic sectors. And most would agree it was the region-wide rapid capital outflows and bursting asset bubbles that brought all of the tiger economies to their knees.

Rapid capital inflows and hot real estate markets have been the ingredients of many a financial crisis, from Asia to Latin America, from the US to Europe. So with the Thai economy experiencing another cocktail of rapid capital inflows leading to a sharp appreciation of the baht coupled with an active real estate market, there is a sense of deja vu. Everyone has become suspicious and more vigilant.

Has a bubble appeared in the real estate market yet? We comfortably report the answer is “no”. If you look for signs of a bubble in the entire real estate market of the kingdom, from housing projects to townhouses, you will see the market has underperformed in recent years.

For example, domestic construction prices have soared 40% since 2000, while single-house prices have increased by just over 20%. This could mean two things _ either improvements in construction technology have lowered the average cost for the real estate sector; or real estate companies cannot fully pass on their costs to consumers due to weak demand or tighter competition. Another informative twin indicator is mortgage growth and interest rates.

Typically, real estate bubbles are preceded by a period of exuberant mortgage growth and low interest rates such as was found in the US prior to the sub-prime crisis and in Asia before the 1997 crisis. Mortgage growth is now in line with the historical average albeit against low interest rates.

Finally, Thailand‘s housing stock has grown at a slower pace each year since 2004, from 3.6% then to 2.5% now. Each region’s growth rate either remains dormant or follows the national figure. Put together, the evidence shows no bad signs yet in the real estate sector _ except in the Bangkok condo market, which is a different story.

Sifting through the finer details might just raise your eyebrows. Of the newly registered residential units in Bangkok so far this year, condominiums account for about 48%, while housing projects and self-built houses account for just 27% and 25%, respectively.

This composition was entirely different back in 2004, when condos accounted for only 3.5% of the total, while the other two categories captured 65% and 32%, respectively.

The reason for this displacement over the past six years is that the average annual growth of newly registered condominiums has been 85%, while housing projects have actually shrunk by 2.6% over the same period and self-built houses grown by only 3%. A similar phenomenon occurred before the 1997 Asian crisis, when condos’ share went from 5% in 1988 to 40% in 1998. The situation no longer appears normal from this perspective.

Breaking it down further, high-end and middle-market condominium prices in Greater Bangkok have outpaced land prices by 20-30% since 2002. This persistence in condo prices even defies the previous crisis, in which prices for land and low-end condos fell.

Thus, if land prices are not the driver, something else must be. One possible explanation would be that people’s behaviour has changed over time. Maybe they just preferred housing projects back in 2004, while condominiums are the new hype in 2010. Yet this fails to explain history repeating itself from the pre-crisis era.

Another explanation might be the changing urban landscape via new and more elaborate mass transit routes. To answer this, we must reconcile condo prices with other data to see if their movements have been in line with fundamentals.

An analysis by TMB Analytics found that high-end and middle-market condominiums in Bangkok are priced about 10% above the baseline. To get at this, we built an econometric model taking into account demand and supply factors such as take-up rate, interest rate, mortgage growth, income level and the percentage of sold units.

The results suggested low-priced condominiums remain priced about 6% below the baseline, while the high-end and middle-market units have overshot their baselines by 10%. These levels are nowhere near a bubble but nevertheless are mostly overpriced, justifying the concern that a real estate bubble might be incubating in those empty units that generated the rising unsold rate we found in the data.

No model is perfect, of course, but at least this gives us a glimpse at the situation we might have on our hands. In fact, the biggest caveat of our analysis strengthens our case for closer monitoring of the market. As anyone who has worked with real estate data in Thailand can attest, limitations in the condo market are severe. Information sources are limited, and any deeper data are closely guarded by those who control access.

Our feeling is the condo price data we have may understate the current market price. There is no way to know for sure how much of an understatement this could be.

However, if this is true, then the extent of the bubble trouble may already be far bigger than what the model has captured. We’re afraid that could already be the case.

TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Dr Benjarong Suwankiri and Tospol Kawsombutwattana, senior analysts at TMB Analytics. They can be reached at




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