The Bank of Thailand's new requirements meant to improve mortgage lending quality and curb rampant search-for-yield behaviour in the residential market remain a subject of debate among developers, notably in Greater Bangkok, where mass transit development has ignited the property market's expansion.
The Real Estate Information Center (REIC) predicted last week that new residential supply being launched in Greater Bangkok next year would shrink by 20% if the new requirements on mortgage lending remained unchanged, while Tris Rating earlier warned that the measures could have a negative impact on property developers in the short run.
Commercial mortgage lenders have asked the Bank of Thailand to focus on curbing mortgage lending for third and subsequent home purchases, delaying stricter measures for the wider market that are set to be implemented in early January.
Lenders also want the central bank to clarify if the measures apply to multiple mortgages or homes owned.
Mortgage curb needed
"The home loan market had higher competition, resulting in lax mortgage standards," said Sakkapop Panyanukul, the central bank's financial stability unit director. "A down payment before lending was not required, and credit lines were higher than the value of the home."
The Bank of Thailand announced on Oct 4 that it would apply new requirements to mortgage lending from Jan 1, 2019.
Under the new requirements, homebuyers are required to make a down payment of at least 20% of home value for new mortgages worth 10 million baht and higher, as well as for second homes. The goal is to curb mortgage and property risks and improve housing loan quality.
Lenders can still extend up to 100% of home value to fund purchases of first homes valued at less than 10 million baht per unit.
The central bank will also require lenders to limit mortgages together with top-up mortgages such as personal loans and loans for mortgage-reducing term assurances to 80% of home value for second homes and those worth at least 10 million baht, and 100% for first homes valued below 10 million.
This new requirement comes after the central bank found that the financial system was showing signs of growing vulnerability in the property sector, given the increasing share of mortgages extended to borrowers for second or third homes, with deteriorating credit standards.
New housing models are showcased at a fair in Bangkok. PATIPAT JANTHONG
Almost half of new mortgages in the second quarter had a loan-to-value (LTV) ratio of more than 90%, and those with a loan-to-income (LTI) ratio above five times made up nearly one-third.
According to the central bank's current guidance, mortgage lenders can loan up to 90% for low-rise residential projects and 95% for high-rise projects. The central bank's LTV guidance is based on risk-weighted regulations under the Basel III international financial standards.
If financial institutions offer mortgages with LTVs that do not exceed the threshold, the risk-weighted capital requirement is 35%, which is increased to 75% if the level is above the threshold.
Specialised financial institutions will also be required to apply the new standards.
The public hearing process on the measures runs until Oct 22. The regulator is set to announce the official rules in November.
"We're trying to strengthen the financial economy," Mr Sakkapop said. "With these new requirements, people will be able to get a house at a suitable price as demand from investment buyers and speculators will drop."
Homebuyers will also have more financial discipline and not borrow unnecessarily, he said. The hope is that investment buyers will not underestimate the risks, lowering the likelihood of them being affected by a sharp drop in property price.
"Investment buyers will need to have more savings to buy a property," Mr Sakkapop said. "Developers will be able to make an appropriate investment, while financial institutions will have discipline in lending. In the end, the country will have a stronger economic foundation."
Appeals from developers
Atip Bijanonda, formerly president of the Thai Condominium Association, said the new requirements should not be applied across the board, as the ratio of speculators in the condo segment has sharply dropped for years to less than 10%.
Second-home projects are advertised at a housing fair. PORNPROM SATRABHAYA
"Speculators will book a unit at an off-plan project and resell it while making a down payment, before construction is completed or during the transfer period," he said. "They usually do not borrow. Those borrowing are investment buyers."
At present, buyers who do not plan to use the property are mostly investors buying to gain a rental yield, Mr Atip said. These buyers account for 15-20%, which has also fallen.
He said the beginning of next year is too soon to apply the new requirements because many condo buyers who booked a unit before the central bank announced the new LTV rules will receive their unit transfer some time next year.
"Those buyers have limited time to prepare for a down payment of 10-15%, and they should not be punished because of bad timing," Mr Atip said.
Problems may arise, such as customers delaying their unit transfers repeatedly, trying to find defects at the project or complaining to the Office of the Consumer Protection Board, resulting in a heavy workload for the office.
"If the new LTV is applied on July 1, new buyers will have a longer time to consider their financial ability and prepare for a higher down payment," Mr Atip said.
There are many residential units completed and ready for transfer that have a greater chance to be sold if the rules are delayed for the general public, preventing liquidity risks, he said.
Suggestions
Mr Atip suggested that the new requirements be applied starting with third mortgage contracts, as in Malaysia, as many buyers in the condo segment buy a unit as a second home.
"Many mortgage borrowers buy a first home in the suburbs and will buy a second in the inner city, where mass transit lines allow more convenient travel," he said. "Some parents want to buy a condo near their children's school."
First-time workers may buy an affordably priced unit because their income is limited, but when they receive a promotion or have a family, they often change to a bigger residence.
A new condominium project is on sale at a housing fair. SOMCHAI POOMLARD
"These types of buyers may not have the flexibility to sell their existing unit, which may still have a mortgage, before getting a second mortgage for a bigger place," said Mr Atip, also president of the Housing Business Association and a director of the executive board of the Thai Chamber of Commerce.
Some developers are concerned about loan co-signers who are not real buyers and might buy a unit in the future. Co-signers would be deemed as borrowing for a second unit, even if they did not purchase the first home for which they co-signed the loan, he said.
The cash-back condo problem makes up less than 1% of the market, Mr Atip said, referring to a scheme between some developers and financial institutions where they hold a seminar to persuade customers to buy a condo unit to receive cash back.
"The central bank should control these developers to prevent such schemes," he said.
Mr Atip said condo oversupply in Pattaya and Phuket was mainly caused by project finance. The central bank should ask financial institutions to research which locations have an oversupply before providing project finance.
"Dig at the roots instead of hacking at the leaves," he said.
Apa Ataboonwongse, president of the Thai Condominium Association, suggested the central bank apply the current LTV of 90% more efficiently for six months because implementation might be lax, driven by high competition in the mortgage lending market.
"If it does not work and the new LTV is needed, the central bank should reduce the LTV on a step-by-step basis," she said. "Maybe start with 85-90% for most buyers, particularly those in the middle to lower-end segment who cannot keep up with a sharp decrease in LTV."
The new LTV curbs should also be waived for homebuyers in Bangkok and the three Eastern Economic Corridor provinces, she said, as buying a condo in inner Bangkok as a second home is typical for many living in suburban Bangkok or neighbouring provinces.
"Buyers who signed a contract before the announcement date should have the right to use the LTV rule effective on the contract signing date," Mrs Apa said. "Top-up mortgages should also be separated from house mortgages."
Meesak Chunharuckchot, president of the Chonburi Real Estate Association, said the new rules will have a larger impact on small developers than large ones.
"There are a lot of buyers who booked a unit with a down payment of 10%," he said. "If small developers' customers cannot scratch together the extra down payment amount to accept the unit transfer, the small developers will be hard hit, as they have higher costs than large players."
Visanu Suchatlampong, executive director of SET-listed developer AP Thailand Plc, said the LTV should stay at the same level for low-rise buyers (townhouse, duplex house, single house) because there are no speculators in the segment.