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STOCK

Property stocks drop as BoT tightens rules

By SOMLUCK SRIMALEE

THE NATION

Published on November 12, 2010

The stocks of major Thai residential property firms plunged yesterday in reaction to the Bank of Thailand’s plan to impose stringent lending rules for mortgage loans, a move that has alarmed a few leading figures in the industry.

While the SET Index fell for the third straight day to close at 1,029.86, Pruksa Real Estate, the country’s second biggest developer by market capitalisation, lost 6.5 per cent to Bt20, while Asian Property Development fell 7.3 per cent to Bt5.7.

Supalai, another major developer, plunged 7.9 per cent to Bt10.5.

The stock plunge followed the Bank of Thailand’s plan to impose more stringent rules on mortgage loans in a precautionary move to prevent an asset-price bubble.

The sub-index on property development stocks fell 2.9 per cent yesterday.

According to real-estate executives, the new rules are expected to take effect on January 1, 2011, subjecting commercial banks’ mortgage loans to higher reserve requirements.

The risk weighting of mortgage loans will likely increase from 35 per cent to 75-100 per cent for all residential property loans with a unit price of Bt1-10 million.

Such a weighting is used to calculate the minimum amount of capital funds required by commercial banks to support their lending.

The higher risk weighting will increase banks’ lending cost and capital requirement. Thus, borrowers will have to bear higher costs and possibly higher interest rates.

Pruksa’s director and chief business officer, Prasert Taedullayasatit, cited Bank of Thailand (BOT)’s deputy governor Kerk Wanikkul as saying earlier this week that the new rules could be effective in January once the central bank’s Financial Institutions Policy Committee switched on its green light.

Prasert said consumers will have to increase their down payment if the new rules are revised from the current 0-10 per cent to 15-20 per cent.

For example, a buyer will have to increase the budget from Bt50,000 to Bt100,000 if he or she plans to buy a Bt1-million unit.

Currently, new residential property sales in Thailand total 100,000 units annually, with 18 per cent of home-buyers getting mortgage loans amounting to 95-100 per cent of property value.

Another 13 per cent of buyers get mortgage loans amounting to 90-95 per cent of value from the lending banks.

PETITIONING THE GOVT

Prasert said that if the central bank still insisted on implementing the measures, the three property associations would consider petitioning the government to demand a rethink.

Business Housing Association president Issara Boonyoung said the BOT may revise its plan after meeting representatives of Thai Real Estate Association, Business Housing Association, and Thai Condominium Association.

According to Issara, the BOT will increase the risk weighting from 35 per cent to 75-100 per cent if down payment is less than 10 per cent.

“All the three associations have asked the BOT to revise the rules again by differentiating low-rise from high-rise residential projects as the two have different business cycles,” he said.

Condominium projects have a longer time of one-and-a-half to two years from sale to ownership transfer, while low-rise projects such as townhouse and single detached houses have a shorter cycle of 6-8 months.

According to Issara, business could drop 5-10 per cent if the new lending rules are stringent.

LPN Development’s managing director Opas Sripayak agreed that business would be down 5-10 per cent if the new rules were enforced.

This is evidenced by the company’s recent increase of down-payment requirement for Lumpini Riverside-Rama 3 project.

When down payment was up from 10 per cent to 15-20 per cent, sales dropped by 10 per cent, Opas said.

The Thai residential property market is worth Bt700 billion annually, about 8 per cent of gross domestic product, with high multiples in terms of related products such as furniture, and home appliances, etc.

Other sectors of the economy will also be affected, according to Sretha Thavisin, president of Sansiri, the second largest listed property firm.

Meanwhile, Khan Prachuabmoh, managing director of Government Housing Bank, said home-buyers will be hit by more stringent lending rules due to higher down-payment requirement.

He said the bank could help customers by providing additional loans on furnishings and amenities.

However, Khan believes that the Thai market is still alright.

For example, there is real demand for housing along Bangkok’s mass-transit routes due to high transport costs for those living in the suburbs.

Khan also suggested that the government should set up a mortgage insurance scheme to help low-income earners get mortgage loans from financial institutions.

-- The Nation 2010-11-12

[trogers]

Prasert said consumers will have to increase their down payment if the new rules are revised from the current 0-10 per cent to 15-20 per cent.

According to Issara' date=' business could drop 5-10 per cent if the new lending rules are stringent.

LPN Development’s managing director Opas Sripayak agreed that business would be down 5-10 per cent if the new rules were enforced.

This is evidenced by the company’s recent increase of down-payment requirement for Lumpini Riverside-Rama 3 project.

When down payment was up from 10 per cent to 15-20 per cent, sales dropped by 10 per cent, Opas said.

[/quote']

A 100% mortgage? Seems a repeat of the sub-prime loan fiasco in a different bottle.

These bankers and real estate businessmen should be educated enough to differentiate between latent demand and effective demand, and not just lump everything into a term called real demand.

Human beings always demand, but a large number of them cannot afford to make the purchase. Their demand is real alright, but not effective, unless bankers come along with their IOUs.

[Pib]

Sounds like the BOT is trying to lead-turn what can be a risky lending practice. But regardless of whether a bank will give a 80, 90, 100% LTV, probably a bigger risk factor is verification of a person's income. So much of the current sub-prime loan mess in the western world, especially the US, was caused by lending to almost anyone without good verification of income, verifying years on the job, etc., which resulted in people not being able to pay back the loan because their income was insufficient/erractic. No shortage of people willing and able to say/sign anything to get a loan.

[webfact]

Central bank moves to cool property loans

By BUSINESS DESK

THE NATION

Measure a pre-emptive action to preven bubbles; sector unlikely to be hit badly

The Bank of Thailand yesterday imposed what it called a preventive measure to rein in aggressive mortgage lending by commercial banks, with strong support from the Finance Ministry and bankers, who expect impact on the property-development industry to be slight.

TMB Bank chief risk officer Bart FM Hellemans was not surprised by the measure.

“This kind of decision is not new. This is to calm down the market before it’s too hot. It’s like a conservative, risk-averse move. [it’s better] too early than too late,” Hellemans said.

TMB Bank has to be more careful with new applications for home loans and project financing, bank vice president Naris Sathapholdeja said.

Hellemans said TMB had tightened its rules for project financing more than for a year and a half ago when the bank started to see signs of overpriced condominiums.

Bank of Ayudhya senior vice president Takorn Piyaphand conceded that the measure would prompt financial institutions to be more prudent on risk assessment for loans, as extending more loans would increase reserves, driving costs up.

This measure serves as a warning on property expansion and financial institutions’ loan extensions and is unlikely to deter property loans, Kasikornbank first senior vice president Chatchai Payuhanaveechai said. Most property developers are listed on the stock market and can mobilise funds from other sources, including debt instruments, he said.

“This gives a clearer picture to the market, reflecting on the property sector’s higher share prices,” Chatchai said. “And commercial banks do not lose any advantage to state banks due to their different targets. Commercial banks extend home loans of at least Bt2 million, while state banks provide an average of Bt700,000 to Bt1 million.”

Finance Minister Korn Chatikavanij cautiously backed the central bank’s move.

“The Bank of Thailand is independent and it can set requirements on bank loans. The BOT also has a duty to monitor economic risks,” Korn said in response to complaints by property developers about the central bank’s move to step up measures to prevent a real-estate bubble.

Korn noted that if developers had different assumptions or information than the BOT, they could consult with him, and he would then take it up with the central bank on their behalf. “Or they could directly talk with central bank Governor Prasarn Trairatvorakul.”

Several central banks in Asia have started to put in place more stringent rules as they spot potential real-estate price bubbles. In Thailand, huge capital inflows threaten to push up asset prices and inflation. China is reportedly preparing new curbs on property lending, as it is expected to overshoot its inflation target this year amid a continuing surge in property prices.

Under the BOT’s new rules, for properties priced below Bt10 million per unit, from January 1 financial institutions will be required to cap mortgages at 90 per cent of condominium prices. The loan-to-value (LTV) ratio for low-rise housing will be capped at 95 per cent from January 1, 2012.

For condominiums on which the down payment is less than 10 per cent of value, the risk-weighted assets must be at least 35 per cent of the value. For units with down payments lower than 10 per cent, the risk-weighted assets must be 75 per cent.

The risk-weighted assets for low-rise developments are set at 35 per cent if the down payment is 5 per cent of value or more. With lower down payments, the risk-weighted assets will be 75 per cent.

“The Financial Institutions Policy Committee is of the opinion that the BOT should cap the LTV ratio, with consideration of impacts on all parties including buyers, developers and commercial banks,” BOT Deputy Governor Krirk Vanikkul said in a statement.

“This preventive action will mitigate future risks. The problem might get out of hand if we wait until there is a clear sign of risks or when problems emerge.”

But the rules will not be imposed on lending to civil servants and state-enterprise employees, who carry less credit risk.

Krirk acknowledged that there was no sign of a bubble yet, but this move would prevent future risks induced by rising competition. At present, because of fierce competition, banks offer generous lending schemes and demand down payments of less than 10 per cent.

According to the Bank of Thailand, property loans have shown a sharp increase, particularly for purchases of residential units priced below Bt10 million. These loans accounted for 93 per cent of mortgages, and they were mostly concentrated in units priced between Bt1 million and Bt3 million.

However, the non-performing-loan level in this sector remains as low as 0.1-0.2 per cent, compared with the banking system’s combined NPL level of 4 per cent.

-- The Nation 2010-11-13

[neil324]

A government with sense, they are stopping a property bubble forming, thus stopping a property crash which takes out the whole economy when it happens.

[travelmann]

A government with sense, they are stopping a property bubble forming, thus stopping a property crash which takes out the whole economy when it happens.

Theyre too late.

[Chunky1]

of course they are too late.