A higher ratio of new mortgages with loan-to-value (LTV) rates exceeding 90%, the increasing loan-to-income (LTI) proportion and deteriorating bad mortgage rates all point to the residential property market's fragility, warns the Bank of Thailand's Monetary Policy Committee and Financial Institutions Policy Committee.
Despite commercial banks' solid financial positions, they should be prudent in their lending practices, which could lead to higher household debt and affect their ability to cushion risks incurred from the household sector going forward, according to a statement released after the two committees held a joint meeting on June 29.
Risks from unsold supply and competition in the residential market warrant monitoring as property developers' increasing fund mobilisation through bond issuance and stringent bank lending amid a slow pace of sales of condominiums in some locations and price ranges could accelerate supply, said the duo.
Moreover, supply of office buildings and retail space could increase following the launches of many mixed-use property projects in the future, said the statement.
Veerathai Santiprabhob, the central bank governor, recently said the Bank of Thailand had urged mortgage lenders to retain their risk management practices when considering housing loans after had found that some banks extended mortgages at a higher LTV ratio with an aim at tapping a larger market share in the loan segment.
LTV is a lending risk assessment that indicates the ratio of a loan to the value of an asset purchased. Typically, a loan with a lower LTV ratio bears lower risk for both lender and borrower, since less capital is being borrowed.
"The Thai financial system is still fragile in certain areas that could have a significant effect on stability in the period ahead. The meeting paid attention to two main issues: the real estate sector and search-for-yield behaviour," the statement said.
The search-for-yield behaviour continues, particularly in thrift and credit cooperatives, as reflected by their high growth rate of savings and investment, it said, adding that the tightened financial liquidity and the upward interest rate trend could take a toll on funding costs, investment value in securities and financial liquidity of the overall thrift and savings cooperatives as some of large cooperatives are increasingly relying on short-term borrowing.
"The meeting agrees that it's an urgent issue to tighten supervision and revise laws governing thrift and credit cooperatives, especially those with large-scale to strengthen them to perform their tasks in accordance with thrift and credit cooperatives' philosophy without any impact on the overall financial stability and prepare for the possibility of the tightening financial liquidity in period ahead," it said.
Search-for-yield behaviour in other sectors are not worrisome.
Investors are increasingly shifting their money to fixed-income funds, and investment through foreign investment funds is in decline following the growing risks and volatility on the external front, while low-rated debt instrument issuance is reducing after a series of bills of exchange defaults last year.
The Thai financial system must face uncertainties from the monetary policy manoeuvring done by advanced economies, trade protectionism, geopolitical risks and the country's uneven economic recovery, all for which the meeting agreed to monitors some risks that could fracture the system.
The risks include: impacts from the financial liquidity crunch on roll-over debt; borrowing costs in the private sector, particularly for those highly dependent on fund mobilisation via debt instruments; the debt-servicing ability of households and small and medium-sized enterprises; the possibility of a glut of unsold condos, retail space and office buildings; and search-for-yield behaviour, especially among those hunting for high returns from thrift and credit cooperatives, said the statement.