A sneak peek at looming debt balloon

A sneak peek at looming debt balloon

Domestic consumption remains inert as lenders are wary and individuals are more careful about spending

People discuss auto loans at last year's Money Expo. (Photo courtesy of Money Expo Facebook page)
People discuss auto loans at last year's Money Expo. (Photo courtesy of Money Expo Facebook page)

Non-performing loans (NPLs), debt accumulation and stagnant purchasing power have weighed on domestic consumption since last year.

The property and automotive sectors have recorded the greatest impact as the home loan rejection rate and car seizures remain elevated.

A string of interest rate hikes last year contributed to the financing problems, as some economists argue the long stretch of low interest rates before the increases led to the overwhelming level of debt at present.

According to the latest data from the National Economic and Social Development Council (NESDC), the household debt-to-GDP ratio of 90.9% as of the third quarter of 2023 is considered elevated and can constrain the spending of individuals.

Though the recent household debt level is not the highest in the past five years, the concern is with the quality of household debt.

People wanting to buy a house might find it difficult to obtain a loan as financial institutions take a cautious approach amidst fragile purchasing power. Officials also regard car seizures as a critical figure to monitor this year.

Q: Why did the mortgage rejection rate skyrocket?

Alongkot Boonmasuk, secretary-general of the Housing Finance Association, said the current mortgage rejection rate exceeds 50%, compared with a rate of below 50% before the pandemic.

The uptick was attributed to low-income earners wanting to purchase residential units priced below 3 million baht.

Property developers said the higher rejection rate was driven by factors such as the economic slowdown, several interest rate hikes, a high level of household debt, a lack of prepared financial plans, and developers eager to increase sales, all resulting in developers missing their revenue targets.

Typically prospective homebuyers book a unit and make a down payment worth 5-15% of the unit price. This expense is paid on a monthly basis for 6-12 months for a low-rise house, or up to three years for a condo unit, depending on the project and developer.

Debtors and creditors mediate debt via local agencies at a 'debt settlement market' in Nonthaburi in January 2024. (Photo: Varuth Hirunyatheb)

When homebuyers are confident in the economy, they are more likely to book a unit via this scheme.

However, if the economy turns unfavourable during the down payment period, some mortgage applications are rejected once it is time for the property transfer.

The reasons for the rejections might be related to details about the homebuyers or the policies of financial institutions. For example, a poor economy might mean some buyers are earning less income, while banks may take a more cautious approach to lending.

"Sometimes an employer's business is affected by the economy, leading banks to reject the employee's mortgage application," said Kessara Thanyalakpark, managing director of Sena Development Plc.

Five interest rate hikes last year also contributed to a higher rejection rate as it reduced consumer purchasing power.

The higher rates also prompted banks to impose stricter lending rules for both those who already booked units and new buyers.

Q: How did the interest rate hikes affect buyers and developers?

For buyers that completed their down payment, the higher rates at the time of property transfer compared with when they booked the unit reduced their borrowing capability.

"Every one percentage point increase in interest rates causes a 7-8% decrease in home purchasing power," said Uthai Uthaisangsuk, president of SET-listed Sansiri. "The increase in interest rates over the past two years, as the policy rate rose from 0.5% to 2.5%, has affected home purchasing power by 15%."

This means homebuyers who could afford a residential unit priced at 5 million baht last year can no longer afford it now, opting for a unit priced at 4.25 million instead, he said.

In general, homebuyers tend to prefer units priced higher than what they can afford, said Mr Uthai. For example, for people who can afford a 5-million-baht unit, they often choose a unit priced at 6 million, he said.

Developers are now screening homebuyers' mortgage repayment ability before allowing them to book a unit to prevent mortgage rejections from banks.

With elevated interest rates, prospective homebuyers often need to pay a higher down payment or seek a co-borrower to be approved for a mortgage.

A digital ad promotes mortgages at Money Expo 2023. (Photo courtesy of Money Expo Facebook page)

However, not all potential homebuyers are successful utilising these options, leading to higher mortgage rejection rates.

In addition, some homebuyers misunderstand the developer's screening process on the booking date, thinking it guarantees mortgage approval, according to developers.

Some potential homebuyers accumulate new debt, whether from credit cards or a car purchase, during the down payment period. As a result, they are sometimes rejected for mortgages because of the additional debt.

Some developers also sought to increase sales without considering the mortgage payment ability of potential buyers. However, many of them abandoned this strategy after realising it was a waste of sales time.

The impact of the higher rejection rates was evident in the fourth quarter of 2023 when many developers, even the bigger players, posted lower revenue than expected.

Q: Will NPLs in the automotive industry escalate this year?

NESDC data indicates in the third quarter of 2023, the quality of household debt deteriorated for all types of credit, with NPLs amounting to 152 billion baht, or 2.79% of total loans, up from 2.71% in the previous quarter.

At the end of 2022, NPLs totalled 140 billion baht, making up 2.62% of total loans.

The top four categories for highest household NPLs in the third quarter of 2023 were credit cards (3.34% of total loans), residential mortgages (3.24%), personal loans (2.38%) and auto loans (2.10%).

Though auto NPLs ranked fourth on the list, special mention (SM) auto loans were remarkably high for the quarter at 14.6%, followed by personal loans at 6.66%.

SM loans refer to debts unpaid for 30-90 days, the category before NPLs, described by banking officials as requiring special attention.

SM loans serve as a warning signal, according to bankers. If SM auto loans and car seizures in 2023 are combined, it is reasonable to forecast NPLs in the auto sector could increase this year.

In 2023, up to 250,000 cars were seized, compared with the typical average of 180,000 seizures a year, said Surapong Paisitpatanapong, the Federation of Thai Industries' vice-chairman and spokesman for its Automotive Industry Club.

The seizures tallied the highest level in five years, according to the Office of Industrial Economics (OIE).

Banks maintained stricter lending criteria for auto loans, hampering domestic car sales.

According to the club, sales of pickups remained sluggish in January, plummeting more than 43% year-on-year as banks remain cautious in determining loan requests.

The decline in pickup sales was the main reason overall vehicle sales sagged in Thailand in January, said Mr Surapong.

The slowdown in the domestic automotive industry was a key factor affecting January's Manufacturing Production Index, which decreased by 2.94% year-on-year to 99.2 points, according to the OIE.

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