Fears of a bubble can be quashed by looking at the lessons learnt from the 1997 crash.
The year 1997 probably sends shivers down the spines of those who were effected by the Asian financial crisis of the same year. Starting in Thailand, this was one event that hit many investors home and abroad. Ahead of the crash Thailand was experiencing unprecedented growth. Increasing by nine percent annually, the economy was growing at the highest rate of any country.
But in July 1997 the Thai baht collapsed and a multitude of industries were hit including the real estate sector. The property market experienced a bubble like no other. It took four years for the economy to recover thanks to a hike in taxes that helped repay the debts it had acquired. But with fears of a bubble on the horizon again, what can we learn about the changing environment that ensures that this is just a fear?
1. Supply and demand.
When demand outstrips supply, prices go up and the market is buoyant. Switch it the other way and a glut of properties ensures that prices remain low and the surplus is hard to reduce. Ahead of the 1997 crisis demand for units stood at approximately 70,000 to 80,000 per year. However there were some 140,000 to 170,000 units made available annually. This clearly demonstrates an imbalance that contributed to the crash. Something the industry has not been keen to replicate since. Learning from this catastrophic contributing factor, supply of units has decreased. Since 2013 the number of units in central Bangkok was recorded at 85,000, followed by 72,000, 60,000 and 50,000 for the subsequent years. This alone illustrates that we are not even close to the levels experienced pre-1997.
2. Astute developers.
As illustrated in the previous point developers are noting marketing conditions and adapting accordingly to prevent a bubble. Since the 1997 crash there has been a heightened importance of understanding exactly what is going on in the market and its influencing factors. Developers now have research departments dedicated entirely to this to make sure they are one step ahead of the game. Subsequently it is predicted that less units will be launched this year compared to last in order to help the market.
3. Shifting buyer demographic.
One very noticeable aspect of the 1997 crash was the buyer profile of the properties. There were a huge amount of speculative investors with some units being sold three times within one day. When questions are raised about whether the Bangkok market is heading towards another crash, many say no. Why? Well purchasers of Bangkok condominiums now tend to be end users and there are diminishing numbers of those who are just speculating on the market.
4. Lending.
To top it off many of these speculators pre-1997 borrowed heavily for their purchasers. This increased the risk of the bubble and is one reason why many believe another isn’t imminent. According to the Bank of Thailand there have not been any noticeable increases in lending recently that could signify a bubble. Much of the transactions occurring at the moment are from cash rich people. Plus the industry is more regulated as a whole with tighter lending requirements. Banks are on the look out for warning signs of any possible bubble to ensure it won’t happen again, and the National Credit Bureau has a warning system in place to prevent it happening.
