Thai Household Debts Nearly Double In Seven Years

[Heng]

movable debt = depreciation (in most cases) = buying to save face = stupid

The US and UK citizens have higher debt levels then any other people on the planet, i dont believe all this money was borrowed for the educational needs of their kids.

Thais are no more or less stupid about borrowing then anyone else.

If you take a snapshot of the current situation of the countries mentioned, I'd say the they are better off because even amongst the debtors, I think you'll find a much higher percentage that still have 100% equity in their homes, so they don't run as much of a risk of becoming destitute/homeless. The same cannot be said for a surprising amount of middle class home "owners" in the US and UK. And because of the nature of interest, that weight only becomes heavier and heavier.

Oh now, some folks want to make this into a racial thing or a this country vs that country.... my above statement still stands no matter what a persons race, color, creed etc is.

Not saying it's a competition. Just a comment regarding the differences between the demographics involved. I agree with your comment.

Having 100% equity in a house, whilst simply a figure, is only worth something if you can realise the value.

It's certainly worth something to people who get their homes foreclosed on and only have cardboard boxes for shelter.

[sunreader]

someone want to tell me why banks in Asia don't lend money to buy a house to any Joe the way banks in the West do?

Because they are either more financially astute or just less greedy...who knows...

"those who are stupid with their money deserve to be separated from it, it is the best way to learn financial responsibility "

Unless your a major financial institution, in which case the government/taxpayer will come to your aid...as per Northern Rock et al.

I can't understand it, when the banks make billions they keep it to themselves and pay their 'top men' huge bonuses, when they lose billions and are in danger of collapse they ask the government for a handout (financed by? the tax payer)

Its a win win game for some.

[YoungFarang13]

heng i see you mention often that many thais have their own home from their parents, but if there are multiple children, then what happens? or is it a goal of many thais to help each child build/own a home?

[Heng]

heng i see you mention often that many thais have their own home from their parents, but if there are multiple children, then what happens? or is it a goal of many thais to help each child build/own a home?

Actually it's a combination of generational ownership and people not purchasing homes/continually upgrading one's home to a bigger and better home with the intent to sell even when one's financial status improves. Part of the reason for the latter is that a lot of people don't like to move from the home where they built their fortunes (even if their fortunes have outgrown their homes). The result is that more people pay off their homes, whether quickly or slowly before they even think about purchasing a 2nd, 3rd, 4th, etc. home or property. The additional properties aren't meant to be primary residences and hence there isn't much of a rush to get into debt. First time home buyers, or buyers who are purchasing their one and only home often have a time constraint factor which can lead to them getting into less than desireable loan/mortgage terms.

On average I purchase about 2 properties per year, but if I chose to leverage myself with mortgages, I could probably purchase many more, but it goes against the 'cash and carry' philosophy that was taught in my house when I was younger.

Although of course you'll find plenty of examples that go for AND against this generalization.

[Scott]

I agree that learning financial management skills needs to be taught in school. I also agree with Heng, but it's best implemented at home. Unfortunately, if parents aren't careful with their money, this is the lesson the child really learns.

Indebtedness is, as far as I am concerned, a kind of slavery. Your options get so limited and the stress is enormous. I have been in debt and debt free--much prefer debt free.

[YoungFarang13]

so do you buy to rent out or do you try to refurbish/flip them or do you just collect them for your giks?

[Heng]

so do you buy to rent out or do you try to refurbish/flip them or do you just collect them for your giks?

Holding long and renting out. Sometimes I refurbish, sometimes I just put up a 'for lease sign' on an empty piece of land or run down shophouse and someone happens along and develops it for me. It's kind of like the eBay theory of "that broken HP printer with smashed up cover and cut power cord" is EXACTLY what someone is looking for. It makes it even easier to lease out again if they happen to falter (as MOST businesses do), and nothing beats that *getting something for nearly nothing* feeling.

And I don't have any giks (or at least don't have any that I'd recognize as such, much less do something silly like allocate family assets to).

[YoungFarang13]

i didnt think so. i just asked because many in the housing forum are convinced that the thai property market is essentially being held up by wealthy Thai males buying property to house their harems.

thats a brilliant idea. only lease to those whose business plan is lousy, then you get to keep the deposit. you must love farang renters.

Edited April 22, 2008 by YoungFarang13

[HAL9000]

No, the best way to learn financial responsibility is to teach basic finances to young people in school. Knowingly giving out loans to people who clearly should not be taking on that debt is the irresponsible behavior.

It's the same in the US. That's why we have a sub-prime lending crisis, record levels of credit card debt, and record low levels of savings. People aggressively push financial products without a sense of social responsibility to get their salaries and commission. Then there's the corporate raiders who go to a company, strip all the capital out of it, and leave the company to go on to the next victim.

[Heng]

thats a brilliant idea. only lease to those whose business plan is lousy, then you get to keep the deposit. you must love farang renters.

Well, it's not exactly my business plan. I'd much rather have a tenant be successful at whatever they do and lease from me long term, even if they happen to develop a piece of property from nothing for us.

What happens when they falter is simply the worst case scenario which for the owner is not such a bad deal.

[Firefan]

Interesting. Your nos match exactly my estimate for Thai inflation being 10% a year. Something one needs to incorporate into ones financial planning when settling here.

CHeers!

There is me, my wife and daughter.

We lived in Chiang Mai from 1994 to the end of 1995. Than from 2003 and still here.

I have kept up our income and expenditure records for over 20 years.

Over the last 13 years the parts of it that we actually lived in Thailand, our lifestyles have not changed very much except that we rented an apartment and now own our house, well my wife does anyway. Still eat about the same, use the same amount of water, electricity and gas etc.

Back in 1994/95 my cost of living here was 8000 baht per month. This included social, daughter's education, clothing, medical and all the rest of it.

These days, I have had to cut out most of our social, too expensive, my daughter no longer goes to school she has graduated, no longer use air con only fans, cut out soft drinks, drink mostly water, stopped smoking, have motorbike no car, not paying rent, the house my wife owns and now our cost of living has reached an average of 27000 baht per month. Although on this amount we are not suffering, but certainly not living the high life.

The frightening part is, who knows what the cost of living is going to be in the next ten years.

To be honest every time I purchase anything in a store or supermarket, I always think that there is some big fat guy smoking a cigar seating behind a desk, raking in the benefits of my hard earned dosh.

[toptuan]

Opening Address

M.R. Pridiyathorn Devakula, Governor of the Bank of Thailand

[for “FITCH Rating’s Annual Conference 2004 on Consumer Finance“

Bangkok, Thailand - September 16, 2004]

Distinguished guests, ladies and gentlemen,

I would like to welcome all of you to this highly relevant conference on consumer finance and securitization appropriately organized by FITCH Ratings Thailand. I would also like to show my appreciation to FITCH for inviting me to give today‘s opening remarks.

Ladies and gentlemen, although consumer finance has long been a staple of banking in the west and developed economies, it is still a relatively new and open frontier for Thailand. As I thought of my opening remarks, I am reminded of two stories that can capture the reality and the impact of this new world in the context of Thailand‘s dual economy. It is not all from my memory since as you may agree I am still too young for historical anecdotes .

As a university student some 30 years ago, I met two fellow classmates that came from completely opposite family backgrounds. The first came from a well-off family that supplied him with cars, expensive clothes and a lot of disposable income . The second one was from a poor family and had just enough money for food and public transportation. The wealthy friend did not graduate from college and was later sent to the US to finish his bachelor‘s degree, while the second successfully earned his bachelor‘s degree and won a scholarship for graduate school also in the US.

Neither man changed his ways while living abroad. The first continued his unencumbered spending spree with cars, expensive apartments, and credit cards. The second, more studious and frugal of the two, worked long and hard and was able to bring home his Masters degree on time. His hard work ethic stuck with him as he got older, and today he is one of Thailand‘s successful business entrepreneurs .

The other person however, left the States without any degrees but with a trail of unpaid credit card bills for his parents to repay. He started working in Bangkok but could not stay in any place for long. He started his own small business which loss money and ultimately failed. Unable to change his spending habits, he had to sell his assets and house in order to make good on his debts. To this day, he has no stable income, and must rely on the kindness of people around him for help.

One of the lessons that I have drawn from the story is that immature adults, when presented with easy access to credit, may form the habit of spending beyond their means until they themselves become a burden on their community and society.

A more recent story that comes to mind involves two factory workers who earn approximately 6,000 baht per month. Both were invited to apply for a credit card but only one signed up for the offer. This worker first used his credit card to purchase a TV set, which he could easily finance with his salary. Nevertheless, the TV was followed by a washing machine and a motorcycle, which eventually pushed his monthly debt payment to exceed his income. As he exhausted all of his savings, and could no longer borrow from family and friends, his belongings were repossessed by the creditors , and finally he had to quit his job in hopes of running away from his remaining creditors.

The story highlights a dangerous combination in the fabric of Thai society and that is low-income earners who lack financial literacy , or the ability to effectively manage their finances, but yet have very high marginal propensity to consume . They in turn are more susceptible to unknowingly consume beyond their means, and like my previous story, become a burden on society. That burden is further intensified by the difficulty in finding and obtaining new employment. This probable risk demands that stakeholders take a more cautious approach to ensure quality growth in Thailand‘s consumer finance market.

Ladies and gentlemen, in reality there are more than one type of savings behavior in the

world, but most importantly the savings behavior should be appropriate for the developmental needs of each country. In a developing economy such as Thailand, the customary savings behavior is to save first and spend later. Developing economies can and should benefit from this type of behavior since it allows for vital investments to be made using domestic savings, thereby lessening reliance on external capital inflow , while at the same time promoting an economically viable savings-investment gap.

On the other hand, the savings behavior of the west and developed economies tend to lean toward spend now save later. This type of behavior is practicable in western countries due to many factors that can be summed up under the heading of high level of economic development. The existence of social welfare systems , mature capital markets , diversified economy, and highly educated workforce are a few factors that allow such countries to be able to grow under a relatively low savings environment. Without such factors, a country could find it difficult to grow and develop without straining its finances.

Coming back to Thailand, it is possible to say that with more widespread usage of credit cards and other types of consumer loans, we can expect Thailand‘s savings behavior to become more in line with those of the developed economies. This trend is a double-edge sword that if not managed carefully can cause a severe negative savings-investment gap. Such a predicament will worsen Thailand‘s dependence on external capital inflow that historically has shown its ability to change direction rapidly and jeopardize macroeconomic stability. It is thus with the need for further economic and social development that consumer finance should expand in line with domestic savings.

Ladies and gentlemen, once again we are back at the regulator‘s dilemma of regulating

without dampening the exuberance and vitality of the market. Consumer finance need not be damaging as long as we can be sure that the individual or household have the prerequisite responsibility, maturity and financial literacy to manage their finances.

Both the service provider and regulator must share the task of addressing these concerns and issues. It is hoped that service providers will not only focus on improving their bottom line but to also consider the social impact of their business model. Through the use of gimmicks , service providers risk enticing under-qualified and immature applicants whose inability to manage their finances will only exacerbate social costs and NPLs ….

However, it is understood that competition may pressure service providers to leave behind these social concerns. Thus it is the duty of the regulators to issue rules and guidelines that will level the playing field in order to prevent consumer finance from causing an unsustainable bubble . The industry has already seen the Bank of Thailand‘s forays into the credit card market with rules governing minimum monthly income, interest rate ceiling , fees etc. Going forward, we may come out with social impact rules such as minimum age, or rules to limit the number and types of gimmicks currently being used by some service providers to attract new customers.

Maintaining Thailand‘s economic growth and vitality is a goal that all of us in this room share, and it is my hope that we all will work together towards preserving Thailand‘s existing savings culture, in order to keep it an integral part of Thailand‘s economic development for tomorrow and beyond.

Thank you.

http://www.bot.or.th/bothomepage/General/P...04_%20FITCH.pdf

[jmapodaca]

movable debt = depreciation (in most cases) = buying to save face = stupid

The US and UK citizens have higher debt levels then any other people on the planet, i dont believe all this money was borrowed for the educational needs of their kids.

Thais are no more or less stupid about borrowing then anyone else.

If you take a snapshot of the current situation of the countries mentioned, I'd say the they are better off because even amongst the debtors, I think you'll find a much higher percentage that still have 100% equity in their homes, so they don't run as much of a risk of becoming destitute/homeless. The same cannot be said for a surprising amount of middle class home "owners" in the US and UK. And because of the nature of interest, that weight only becomes heavier and heavier.

Oh now, some folks want to make this into a racial thing or a this country vs that country.... my above statement still stands no matter what a persons race, color, creed etc is.

I believe the points made above regarding US and UK simply point to the different strategies of employing capital; perhaps, the availability of finance and accounting education in these countries provide an advantage.

Imagine what could happen if the Thai people were provided with (at all levels, particularly the poor) formal educational in finance and accounting, and business strategy. The fact is you cannot ask Thai parents at home to teach their children about such complicated topics if they themselves never learned.

The formula,

“movable debt = depreciation (in most cases) = buying to save face = stupid”

*Forgive me, I’m a corporate CFO and CPA and do not recognize this formula Just kidding.

appears to describe consumers’ consumption of non-appreciating assets (e.g. cars, motorcycles, etc.), which only decline in value and generally do provide the owner with income. In short, there is no return on investment/purchase.

Much of the wealth of the US and UK is attributed to capital asset appreciation through business ventures and other investments such as real estate. These countries are very good at creating value with various investment strategies. Unfortunately, as mentioned above, there are also many greedy people in these countries that develop worthless derivative securities only to line their own pockets.

Without formal education in such disciplines, the Thai people will have a hard time teaching themselves how to manage their finances. They (the poor) generally live hand-to-mouth. I have spent a year trying to teach my Thai fiance and her family how to manage money better. Although they are fairly good at it, we have a long way to go.

Edited April 26, 2008 by jmapodaca

[Heng]

The fact is you cannot ask Thai parents at home to teach their children about such complicated topics if they themselves never learned.

The fact is that 'spending less than you make' is hardly complicated. Sure, there are plenty of more complicated lessons down the road, but the majority of less well off folks (Thais, Americans, and Brits included) are where they are because they can't get past that first lesson.

[jmapodaca]

The fact is you cannot ask Thai parents at home to teach their children about such complicated topics if they themselves never learned.

The fact is that 'spending less than you make' is hardly complicated. Sure, there are plenty of more complicated lessons down the road, but the majority of less well off folks (Thais, Americans, and Brits included) are where they are because they can't get past that first lesson.

Spending less money than you make is indeed easy to do provided you make enough to support your family to begin with. My Fiancé’s grandmother - along with all the other folks in the villages of Petchaboon - work for 140 Baht a day to work the corn and rice fields when a chicken costs 150 Baht and pork at 100 Baht. Thank god, or whomever, that these folks can obtain some food from the land and forest areas. Education and a living wage would be great.

I spent the later part of 2007 in Petchaboon, Thailand visiting many, many very nice people that simply don't have enough money to live (i.e, the very poor). It was very enlightening. I am happy to be going again shortly for another 4 months as I love the area.

As an example, the banks provide loans for the kids to go to school and require repayment two years after the child graduates; not interest free of course. Most, therefore, do not finish school, which only perpetuates the problem of getting the poor out of poverty.

Families that farm often borrow money to grow their crops and hope they yield enough to pay off the debt and have some money left over to live. All too often they come up short.

Luckily, my family and I have never experienced not having enough food or proper shelter. But many in Thailand, my experience primarily with villages in Petchaboon, don’t have enough money and many live in shacks. They do what they have to do to support their families and that includes borrowing with the hope they can pay later.

The bottom line is education is key. I also noticed that when Thai’s get a little extra money they spend it inappropriately, at least to my thinking.

[Heng]

Spending less money than you make is indeed easy to do provided you make enough to support your family to begin with. My Fiancé’s grandmother - along with all the other folks in the villages of Petchaboon - work for 140 Baht a day to work the corn and rice fields when a chicken costs 150 Baht and pork at 100 Baht. Thank god, or whomever, that these folks can obtain some food from the land and forest areas. Education and a living wage would be great.

I spent the later part of 2007 in Petchaboon, Thailand visiting many, many very nice people that simply don't have enough money to live (i.e, the very poor). It was very enlightening. I am happy to be going again shortly for another 4 months as I love the area.

As an example, the banks provide loans for the kids to go to school and require repayment two years after the child graduates; not interest free of course. Most, therefore, do not finish school, which only perpetuates the problem of getting the poor out of poverty.

Families that farm often borrow money to grow their crops and hope they yield enough to pay off the debt and have some money left over to live. All too often they come up short.

Luckily, my family and I have never experienced not having enough food or proper shelter. But many in Thailand, my experience primarily with villages in Petchaboon, don’t have enough money and many live in shacks. They do what they have to do to support their families and that includes borrowing with the hope they can pay later.

The bottom line is education is key. I also noticed that when Thai’s get a little extra money they spend it inappropriately, at least to my thinking.

I hear you. I just disagree that education begins at school. I think it should begin at home... if every parent on the planet can somehow teach their kids to speak and eat, I think they can teach that spending 3 satang when one only has 2 satang instead of spending 2 satang when one has 3 satang leads to dramatically different results in life.

I also disagree that 'spending less than one makes' is easy to do for many people. Most people, and that includes many middle class and better to do folks just don't choose to delay gratification for future financial benefit. Often the results are not so far off from what happens to poor people who choose to live their lives the same way.

[jmapodaca]

Agreed, point taken. It's not easy for people to spend less than they make. In the US that fact is all too familiar.

I am all in favor of having people here in the US begin learning how to manage money in Jr. High and High school. Perhaps, then the saving rates would increase from zero to some positive number. Further, perhaps young college bound kids will learn that the generous banks that offer them credit cards are not doing so because they are altruistic.

Parents teaching their children good practices IS very important. My father is a wonderful English and Spanish teacher and generally a very smart man. He, however, doesn't have a clue about managing money and therefore would not have been able to teach me good financial practices; although mom did. Have you ever had a discussion about business with a doctor (e.g., an M.D.)? Everybody has skills and abilities, just not the same ones…..that's where formal education can be very beneficial. But that's just my take......I've spent a lot of time in school.

Edited April 26, 2008 by jmapodaca

[Thai at Heart]

movable debt = depreciation (in most cases) = buying to save face = stupid

The US and UK citizens have higher debt levels then any other people on the planet, i dont believe all this money was borrowed for the educational needs of their kids.

Thais are no more or less stupid about borrowing then anyone else.

If you take a snapshot of the current situation of the countries mentioned, I'd say the they are better off because even amongst the debtors, I think you'll find a much higher percentage that still have 100% equity in their homes, so they don't run as much of a risk of becoming destitute/homeless. The same cannot be said for a surprising amount of middle class home "owners" in the US and UK. And because of the nature of interest, that weight only becomes heavier and heavier.

Oh now, some folks want to make this into a racial thing or a this country vs that country.... my above statement still stands no matter what a persons race, color, creed etc is.

Not saying it's a competition. Just a comment regarding the differences between the demographics involved. I agree with your comment.

Having 100% equity in a house, whilst simply a figure, is only worth something if you can realise the value.

It's certainly worth something to people who get their homes foreclosed on and only have cardboard boxes for shelter.

I am saying that the concept of flipping as has been seen in the US or UK, is only possible in very few places in Thailand. There is no planning to limit the amount of houses so in a very small period of time in areas outside the very centre of metropoli, houses can continue to be built in ever increasing number.

The market here does not work in the same way as we understand it in the US or EU.

[Heng]

I am all in favor of having people here in the US begin learning how to manage money in Jr. High and High school. Perhaps, then the saving rates would increase from zero to some positive number. Further, perhaps young college bound kids will learn that the generous banks that offer them credit cards are not doing so because they are altruistic.

Parents teaching their children good practices IS very important. My father is a wonderful English and Spanish teacher and generally a very smart man. He, however, doesn't have a clue about managing money and therefore would not have been able to teach me good financial practices; although mom did. Have you ever had a discussion about business with a doctor (e.g., an M.D.)? Everybody has skills and abilities, just not the same ones…..that's where formal education can be very beneficial. But that's just my take......I've spent a lot of time in school.

Yeah, I'm not saying I'm against teaching it in school, I'm saying learning basic money management (again, I'm talking about basic stuff like counting beans, playing shop, playing casino, playing bank, teaching frugalness... NOT basic finance and investing) should begin as early as possible. It's one of the thousands of reasons why there is an ever widening wealth gap in the world. A minority of people are getting an early start. By the time they are adults, it's really not much of a contest. It's like pitting a kid who starting playing tennis (or whatever) at age 5-6 against a kid who picked it up in jr. high or high school. Yeah, you can learn all the fundamentals, all the strokes, and watch all the videos in the world for years on end, but it won't make much of a difference.

[Heng]

I am saying that the concept of flipping as has been seen in the US or UK, is only possible in very few places in Thailand.

Yeah, we were talking about two different things apparently. I was saying there is a prevailing view of one's primary residence as a home and not an investment vehicle... hence a higher incidence of 100% equity. And IMHO having a primary residence with 100% equity provides a firmer financial base with which to conduct and expand business wise. I totally understand that many people feel that the tradeoff is limiting one's maximization of capital.

On the subject of flipping: I think many people who flip with their primary (and often ONLY) residence aren't taking the downside (that they may wind up homeless, or in the moderate worst case: a financial tailspin) into account.

Edited April 26, 2008 by Heng

[Johpa]

One of the relative weaknesses in traditional Thai culture is that the economy did not truly become monetized until the 20th century. And until the latter part of the 19th century, a very large proportion of the population were slaves. For most Thais, paying taxes came in the form of corvee labor. So to ask the families to teach monetary economics is not so simple when many of the rural families have never had much exposure to modern economics.

This is in contrast to East Asian culture where even the poorest farmers knew what it was to be in debt to a landlord. Sure, my family in the west had long been exposed to the concept of money, debt, etc, and the basics were taught and simply observed in the home as well as taught in the schools. But sometimes it is hard to teach some of the basics to my Thai family as they do not have the extended context in which to place such lessons.

And the battle for education is not made any easier by the relentless and insidious advertising campaigns promoting the materialistic lifestyles that not all can afford, combined with the equally insidious promotion of the credit and debt industries (AKA the banks) that knowingly promote loans that the borrower should not be taking, pushing loans on borrowers that they themselves, being educated over such matters, would never take if they themselves were in the same economic position as the borrowers. What are the ethics of bankers who promote and sell loans that they know are bad for the borrower? That is not to say that the borrower has no responsibility, but the lenders in such matters being better educated, may be seen to have the bulk of the responsibility.

This is not just a matter for the Thai nation. I highly recommends the documentary film Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders by James Scurlock which looks into the same problem here in the US.

[Heng]

Myself I prefer to blame the neo-sahibs.

[siamamerican]

I am saying that the concept of flipping as has been seen in the US or UK, is only possible in very few places in Thailand.

Yeah, we were talking about two different things apparently. I was saying there is a prevailing view of one's primary residence as a home and not an investment vehicle... hence a higher incidence of 100% equity. And IMHO having a primary residence with 100% equity provides a firmer financial base with which to conduct and expand business wise. I totally understand that many people feel that the tradeoff is limiting one's maximization of capital.

On the subject of flipping: I think many people who flip with their primary (and often ONLY) residence aren't taking the downside (that they may wind up homeless, or in the moderate worst case: a financial tailspin) into account.

I disagree, my 2 brothers flip their primary residences in the US, because the downside is limitted. It even works in a declining real estate market. They need a home to live in and they would lose the same amount on their primary residences if they weren't flipping them. If your house has declined 30%, it really doesn't matter what your intentions were when it was bought. You can hold or sell it. If you sell, buy another home of equal or lesser value.

Flipping primariy residences is one of the safest investments strategies I know of in this real estate market. Flipping investment properties is all about timing and not for me now.

[Thai at Heart]

I am saying that the concept of flipping as has been seen in the US or UK, is only possible in very few places in Thailand.

Yeah, we were talking about two different things apparently. I was saying there is a prevailing view of one's primary residence as a home and not an investment vehicle... hence a higher incidence of 100% equity. And IMHO having a primary residence with 100% equity provides a firmer financial base with which to conduct and expand business wise. I totally understand that many people feel that the tradeoff is limiting one's maximization of capital.

On the subject of flipping: I think many people who flip with their primary (and often ONLY) residence aren't taking the downside (that they may wind up homeless, or in the moderate worst case: a financial tailspin) into account.

Having 100% equity is an admirable course of action. My original post was more related to the idea that prevails in the UK particularly that property values will perpetually increase. Houses in Thailand march to a completely different step, and while you may not lose a bunch, the odds that you will make a tidy increase in the medium term are much less in the land of smiles, unless you buy in absolutely the right place.

People particularly foreigners would do well to understand this.

[Heng]

I am saying that the concept of flipping as has been seen in the US or UK, is only possible in very few places in Thailand.

Yeah, we were talking about two different things apparently. I was saying there is a prevailing view of one's primary residence as a home and not an investment vehicle... hence a higher incidence of 100% equity. And IMHO having a primary residence with 100% equity provides a firmer financial base with which to conduct and expand business wise. I totally understand that many people feel that the tradeoff is limiting one's maximization of capital.

On the subject of flipping: I think many people who flip with their primary (and often ONLY) residence aren't taking the downside (that they may wind up homeless, or in the moderate worst case: a financial tailspin) into account.

I disagree, my 2 brothers flip their primary residences in the US, because the downside is limitted. It even works in a declining real estate market. They need a home to live in and they would lose the same amount on their primary residences if they weren't flipping them. If your house has declined 30%, it really doesn't matter what your intentions were when it was bought. You can hold or sell it. If you sell, buy another home of equal or lesser value.

Flipping primariy residences is one of the safest investments strategies I know of in this real estate market. Flipping investment properties is all about timing and not for me now.

hi there, SA. It's no different than buying something on credit (all the while paying interest on the product) and hoping to sell it. Only this particular product also protects you from the rain/snow/etc.

In the above post you don't really explain how the downside is "limited" other than saying that it's "limited" and one of the "safest investment strategies." You can hold it, sell it, OR lose it and become homeless are the three options. My statement generally refers to those who 'flip' a primary residence asset which represents a disproportionate % of their total asset portfolio. Surely their risk could be limited in your brother's case by how much their home is represented in their total asset portfolio. If your home is only 10% of your total assets, of course flipping isn't such a risk because you could simply pay off your house with a portion of your other assets should you lose your job or if your business(es) goes under. However if your home is say 60-80% of your portfolio, the risk involved is hardly "limited" because you have virtually no plan B for shelter should your job or business situation change AND you are unable to liquidate your primary asset. I just personally disagree with investment plans that might involve you living out of a rented apartment or motel should things go south.

[siamamerican]

I am saying that the concept of flipping as has been seen in the US or UK, is only possible in very few places in Thailand.

Yeah, we were talking about two different things apparently. I was saying there is a prevailing view of one's primary residence as a home and not an investment vehicle... hence a higher incidence of 100% equity. And IMHO having a primary residence with 100% equity provides a firmer financial base with which to conduct and expand business wise. I totally understand that many people feel that the tradeoff is limiting one's maximization of capital.

On the subject of flipping: I think many people who flip with their primary (and often ONLY) residence aren't taking the downside (that they may wind up homeless, or in the moderate worst case: a financial tailspin) into account.

I disagree, my 2 brothers flip their primary residences in the US, because the downside is limitted. It even works in a declining real estate market. They need a home to live in and they would lose the same amount on their primary residences if they weren't flipping them. If your house has declined 30%, it really doesn't matter what your intentions were when it was bought. You can hold or sell it. If you sell, buy another home of equal or lesser value.

Flipping primariy residences is one of the safest investments strategies I know of in this real estate market. Flipping investment properties is all about timing and not for me now.

hi there, SA. It's no different than buying something on credit (all the while paying interest on the product) and hoping to sell it. Only this particular product also protects you from the rain/snow/etc.

In the above post you don't really explain how the downside is "limited" other than saying that it's "limited" and one of the "safest investment strategies." You can hold it, sell it, OR lose it and become homeless are the three options. My statement generally refers to those who 'flip' a primary residence asset which represents a disproportionate % of their total asset portfolio. Surely their risk could be limited in your brother's case by how much their home is represented in their total asset portfolio. If your home is only 10% of your total assets, of course flipping isn't such a risk because you could simply pay off your house with a portion of your other assets should you lose your job or if your business(es) goes under. However if your home is say 60-80% of your portfolio, the risk involved is hardly "limited" because you have virtually no plan B for shelter should your job or business situation change AND you are unable to liquidate your primary asset. I just personally disagree with investment plans that might involve you living out of a rented apartment or motel should things go south.

Hi Heng,

There are quite a few variables that might come into the deciding to flip. I still stand by my statement. Flipping your primary residense is extremely safe.

Heng, I don't know your family or financial situation, but it really doesn't matter. If you plan on not renting, then you need to live in a home. Your risk is limitted, because you have a plan "B". If you lose your job or your business goes under, don't flip the home until you have fixed your financial situation. There is no additional risk, because you would face the exact same issues if you hadn't intended to flip the house. It's the safest investment I know of as long as you don't buy a house that is out your income league. Why would you liquidate your primary residense if you didn't have another place to live??? Just because you intendended to flip, doesn't mean you have to.

Flipping your non-primary is where the risk is at. I know of too many individuals that have had their dreams shattered because they got in at the wrong time. Real estate investing isn't for the faint of heart or for those that don't have the finacial base to get through the bad times. Luckily, I chose not to invest in real estate the last few years, knowing I would be leaving the US in the near term.

Live and invest within your means to almost guarantee a good life. Live and invest above your means, and it might end well or badly.

[Heng]

Hi Heng,

There are quite a few variables that might come into the deciding to flip. I still stand by my statement. Flipping your primary residense is extremely safe.

Heng, I don't know your family or financial situation, but it really doesn't matter. If you plan on not renting, then you need to live in a home. Your risk is limitted, because you have a plan "B". If you lose your job or your business goes under, don't flip the home until you have fixed your financial situation. There is no additional risk, because you would face the exact same issues if you hadn't intended to flip the house. It's the safest investment I know of as long as you don't buy a house that is out your income league. Why would you liquidate your primary residense if you didn't have another place to live??? Just because you intendended to flip, doesn't mean you have to.

Flipping your non-primary is where the risk is at. I know of too many individuals that have had their dreams shattered because they got in at the wrong time. Real estate investing isn't for the faint of heart or for those that don't have the finacial base to get through the bad times. Luckily, I chose not to invest in real estate the last few years, knowing I would be leaving the US in the near term.

Live and invest within your means to almost guarantee a good life. Live and invest above your means, and it might end well or badly.

Yeah, I stand by my statement as well that it is only safe for some and can be a rather risky move for many. In the above, "until you have fixed your financial situation" is not always as easy as it sounds.

A) Say someone has a $X thousand a month (or XX thousand Baht) mortgage payment to make when their job is made redundant, or they have a serious car accident or illness. They have no other major assets because they decided to make their home their "safe" primary investment vehicle. They have 30 days to "fix their financial situation" and find a way to make the next mortgage payment with no job and no other major assets they can liquidate.

You don't really face the "exact" same issues because the person with 100% equity has a much longer time frame to fix their financial situation. Instead of having to make a mortgage payment each month, they only need to find a way to make a few hundred $ a month for their food/nutritional needs. Many countries have safety nets for the hungry, but not for the homeless. It's much easier to fight your stomach than to fight the bank and finance companies.

B ) Naturally someone in the same position who could just liquidate one of the beach houses or city condos (probably at less than market price... but not really a big deal because you have another half a dozen) or a tenth of their stock portfolio would have an easier time "fixing their financial situation."

I do agree with your summary statement though (although I think it slightly contradicts your previous statement that flipping real estate is one of the safest investment strategies). My comments really refer to those who do NOT have a proper financial base to partake in such ventures (and am not really referring to well prepared and financially stable flippers)... and for me, I've always believed that one cornerstone of that base is at least one primary residence and preferably many 100% equity properties.

Edited April 28, 2008 by Heng

[siamamerican]

Hi Heng,

There are quite a few variables that might come into the deciding to flip. I still stand by my statement. Flipping your primary residense is extremely safe.

Heng, I don't know your family or financial situation, but it really doesn't matter. If you plan on not renting, then you need to live in a home. Your risk is limitted, because you have a plan "B". If you lose your job or your business goes under, don't flip the home until you have fixed your financial situation. There is no additional risk, because you would face the exact same issues if you hadn't intended to flip the house. It's the safest investment I know of as long as you don't buy a house that is out your income league. Why would you liquidate your primary residense if you didn't have another place to live??? Just because you intendended to flip, doesn't mean you have to.

Flipping your non-primary is where the risk is at. I know of too many individuals that have had their dreams shattered because they got in at the wrong time. Real estate investing isn't for the faint of heart or for those that don't have the finacial base to get through the bad times. Luckily, I chose not to invest in real estate the last few years, knowing I would be leaving the US in the near term.

Live and invest within your means to almost guarantee a good life. Live and invest above your means, and it might end well or badly.

Yeah, I stand by my statement as well that it is only safe for some and can be a rather risky move for many. In the above, "until you have fixed your financial situation" is not always as easy as it sounds.

A) Say someone has a $X thousand a month (or XX thousand Baht) mortgage payment to make when their job is made redundant, or they have a serious car accident or illness. They have no other major assets because they decided to make their home their "safe" primary investment vehicle. They have 30 days to "fix their financial situation" and find a way to make the next mortgage payment with no job and no other major assets they can liquidate.

You don't really face the "exact" same issues because the person with 100% equity has a much longer time frame to fix their financial situation. Instead of having to make a mortgage payment each month, they only need to find a way to make a few hundred $ a month for their food/nutritional needs. Many countries have safety nets for the hungry, but not for the homeless. It's much easier to fight your stomach than to fight the bank and finance companies.

B ) Naturally someone in the same position who could just liquidate one of the beach houses or city condos (probably at less than market price... but not really a big deal because you have another half a dozen) or a tenth of their stock portfolio would have an easier time "fixing their financial situation."

I do agree with your summary statement though (although I think it slightly contradicts your previous statement that flipping real estate is one of the safest investment strategies). My comments really refer to those who do NOT have a proper financial base to partake in such ventures (and am not really referring to well prepared and financially stable flippers)... and for me, I've always believed that one cornerstone of that base is at least one primary residence and preferably many 100% equity properties.

I think I'm doing a bad job of explaining myself or maybe I'm missing the obvious. I still don't understand your logic. Please answer this question:

Does a family need a home to live in?

If the answer is yes, then why does it matter if they intend to flip their primary residence? Also, I never stated that they had a mortgage. If they fall on hard times, they DON'T have to flip it. That is the beauty of the situation. The family can live in the home indefinitely. They haven't incurred any additional risk.

Even if the family leveraged their primary residence, like the vast majority of Americans, they would have the same mortgage payment; regardless of their intention to flip the house. Flipping your primary residence doesn't increase your obligations or increase risk. You will be living under the same roof with the same mortgage payment if you have a mortgage.

I don't understand the homeless analogy. Flipping a home has nothing to do with debt. You can flip a home that you owe zero or a lot. If you borrow, as most do, to purchase your primary residence, your obligations are the same regardless of how long you live in the home. Please explain how flipping your primary increases financial obligations or the chance of being homeless.

The more I read your post - I think you are arguing against mortgages. You talk of struggling to make your next mortgage payment and liquidating assets. I think mortgages have allowed many families to purchase homes, but can also sink families that buy too much of a home and can't afford the payments. If you are referring to highly leveraged people that buy primary residences to flip that they can't afford, then I agree.

[Heng]

Does a family need a home to live in?

Absolutely. However there is a greater tendancy to buy more home than one can afford when one intends to sell it again in the short to medium term... and I've seen that there is often a trend to make the curve even steeper when the prospect (sometimes real, sometimes wishful thinking) of potential near term profit is added to the equation. This is both among Thais and falangs that come to me for short term bridge financing for all kinds of financial shortfalls, often real estate speculation related.... and often AFTER they've been turned down by the local banks. Needless to say, I often also have to turn them down as well.

Flipping a home has nothing to do with debt.

The more I read your post - I think you are arguing against mortgages.

I'm not against flipping OR mortgages per se. I'm simply used to advising folks against getting into flipping and mortgage situations that they IMO shouldn't be getting into. It's hardly a black and white decision that can be labeled as safe, high risk, or flat out a very bad idea. When I hear people getting into 10% down payment 15-20 year mortgages when they have uncertain/unstable business operations or jobs, I often tell them that they might be better off buying "less house" and that adding a 12% p.a. interest loan to their debt portfolio to help finance said house is NOT a good idea. And yes, sometimes I'll tell people that they might be better off putting off that purchase for now.

For flippers, when people don't have sufficient backup assets and just got turned down by K-Bank for a Taweesap loan at MLR for a property purchase they intend to flip, I'll often tell them that I can't loan them the funds either because I don't want to get stuck holding your deep in the soi property that doesn't fit my 'ideal' property for collateral profile should your flipping plans not pan out as you expect them to. I simply tell them that the reason is that I'm considering the often high probability downside.... which they IMO apparently are not.

I'm more than familiar with the emotional state of these folks. There is often a lot of anger and frustration and a feeling that I (or the bank or finance company) am somehow impeding their imminent financial betterment. I often have to explain to them that they shouldn't feel that way because if I had made similar decisions that they were trying to make, that I wouldn't be in a position to loan them the funds to get into such situations. I say that they should probably thank me for giving them this advice. And they often do (but I doubt that they really mean it). And I bet that they often continue their search for leverage options and eventually end up between a rock and a hard place at an outrageous interest rate.

p.s.... and I should say that some might even beat the odds and hit it out of the park as well.

Edited April 29, 2008 by Heng

[kat]

One of the relative weaknesses in traditional Thai culture is that the economy did not truly become monetized until the 20th century. And until the latter part of the 19th century, a very large proportion of the population were slaves. For most Thais, paying taxes came in the form of corvee labor. So to ask the families to teach monetary economics is not so simple when many of the rural families have never had much exposure to modern economics.

This is in contrast to East Asian culture where even the poorest farmers knew what it was to be in debt to a landlord. Sure, my family in the west had long been exposed to the concept of money, debt, etc, and the basics were taught and simply observed in the home as well as taught in the schools. But sometimes it is hard to teach some of the basics to my Thai family as they do not have the extended context in which to place such lessons.

And the battle for education is not made any easier by the relentless and insidious advertising campaigns promoting the materialistic lifestyles that not all can afford, combined with the equally insidious promotion of the credit and debt industries (AKA the banks) that knowingly promote loans that the borrower should not be taking, pushing loans on borrowers that they themselves, being educated over such matters, would never take if they themselves were in the same economic position as the borrowers. What are the ethics of bankers who promote and sell loans that they know are bad for the borrower? That is not to say that the borrower has no responsibility, but the lenders in such matters being better educated, may be seen to have the bulk of the responsibility.

This is not just a matter for the Thai nation. I highly recommends the documentary film Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders by James Scurlock which looks into the same problem here in the US.

Excellent post and spot on, both in Thailand and the United States.