Prices of condominiums in Bangkok are rising in line with economic fundamentals, although there are a number of warning signs which suggest a possible bubble environment could be developing in the sector.
Sutapa Amornvivat, Chief Economist and Executive Vice-President of Siam Commercial Bank’s (SCB) Economic Intelligence Centre (EIC), said: “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,” she explained.
Based on an EIC study of 500 Bangkok condominiums during April, the price-to-rent ratio of a one-bedroom unit is about 17.1.
“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,” noted Amornvivat.
However, the conclusion that there is no property bubble is not entirely accurate because of the absence of historical data since 1997 that would allow the computation of ‘bubble benchmark’ ratio.
There are already warning signs of speculative activity. For instance, prevailing market conditions are encouraging some people to buy condo purchase rights and sell units for a profit.
“It typically takes just a 10 percent down payment to reserve a unit before construction. Assuming 10 percent price appreciation, that means a speculator can earn a return of up to 70 percent on the payment by flipping the unit before construction is completed in a few years.”
Additional warnings sign comes from household incomes. The growth in home purchases has outpaced the growth in the number of households capable of affording a property, according to a survey by the National Statistics Office.
“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 percent during the year,” added Amornvivat.
Andrew Batt, International Group Editor of PropertyGuru, wrote this story. To contact him about this or other stories email andrew@allproperty.com.sg
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