When Will The Chiang Mai Building Bubble Burst?

[Loaded]

For around 2 years there's been ravenous development across the city. We have 3 new shopping malls planned to open this year. There are dozens of housing developments within a 15km radius on arterial roads that lead to the city. Blocks of shop houses are being built along many roads especially along the arterial roads.

It seems to me there just isn't the demand for all this development. We currently have one decent shopping mall that is busy but rarely packed. When supply increases by 300% this year, who will shop in them?

Who's buying the houses and apartments? There are so many being constructed it's difficult to imagine demand is this strong.

For many years roads have been littered by blocks of empty and unsold shop houses. You can see them in the city centre, on the edges and out in the suburbs. Many of the shop houses I've seen built over the last 2 years are still empty but the rush to build continues.

I'm sure a lot of this construction is financed by debt. Developers hope to build and sell quickly enough to reap big profits. However, what happens when buyers disappear or supply outstrips demand? It's not necessary to be a seer to know. Banks will recall loans when developers can't sell fast enough to service debt and this fragile house of cards will collapse.

There are factors fueling this bubble. The baht is seen as relatively safe and money is flooding in to Thailand providing a pool of cash that needs to be invested/spent. However, the money can leave just as quickly too as it did in 1997. as a result of this influx of cash the baht is strengthening against other currencies thus reducing or even eradicating margins for Thai companies that export their products. The minimum wage has put money in people's pockets and they are spending. However, this is creating inflation which is cancelling out the actual benefit of the pay rise.

I'm not an economist but it's not necessary to be one to see that the economy is starting to look similar to the one during the years leading up to 1997 and Thailand's economic collapse. Unchecked debt based on speculative development always ends in tears.

Do you agree?

If yes, when will the the collapse arrive in Chiang Mai?

If no, how can current development be sustained?

[CobraSnakeNecktie]

I'm not so sure normal market mechanisms are in place.

In the past a lot of money to be laundered from inside/outside Thailand financed new projects.

That money source is nearly unlimited.

Even if they sell the project for a big discount it still makes sense because the money is now cleaned.

Similar situation in Miami Florida and drug money to be laundered. The pace of development defied reality now and in the past.

[Greenside]

It's a stretch to imagine that any significant percentage of the resorts, spas and wellness operations in CM province are filled with real people for enough of the time to keep them viable - still phantom guests pay their bills without regard for the price and those rooms don't need nearly so much cleaning.

[Loaded]

I'm not so sure normal market mechanisms are in place.

In the past a lot of money to be laundered from inside/outside Thailand financed new projects.

That money source is nearly unlimited.

Even if they sell the project for a big discount it still makes sense because the money is now cleaned.

Similar situation in Miami Florida and drug money to be laundered. The pace of development defied reality now and in the past.

There was the recent story of the Chiang Mai developer who was also a fairly large drug dealer. However, I'm not convinced it's all drugs money. If it were, this would have been happening for the last 50 years.

You could have a point about money laundering. But on this scale, it would need to have support up to government level.

[HaleySabai]

Yup!....dirty money.....or "black money" as my wife refers to it is what she speculates is the financial sources behind most of the development in CM these days...which may imply bank exemption,thus a debt-free landscape.

[Mitker]

CM has basically 2 shopping centers. Airport Plaza is quite crowded and Kad Suan Khaew is aging. It would make sense (commercially, even if a sad trend for this old city) to replace the second and build maybe a 3rd. But indeed, the current craziness of so many mega projects is hard to understand and will only worsen the growing traffic problems.

As for the residential trends, I do agree that an impressive number of empty (shop) houses can be seen for years now everywhere. Someone was commenting that in the Thai vision, owning an empty property is not so much of a concern and remains seen as an "investment". While in the West, "opportunity cost" makes it a failed strategy if other options exist, this Thai approach may delay the trigger of a burst unless a massive negative opinion emerges among potential buyers.

Like always in economy, at the end of the day it is the psychological factor that dictates the trend. Laundering opportunity is part of it.

[CobraSnakeNecktie]

I'm not so sure normal market mechanisms are in place.

In the past a lot of money to be laundered from inside/outside Thailand financed new projects.

That money source is nearly unlimited.

Even if they sell the project for a big discount it still makes sense because the money is now cleaned.

Similar situation in Miami Florida and drug money to be laundered. The pace of development defied reality now and in the past.

There was the recent story of the Chiang Mai developer who was also a fairly large drug dealer. However, I'm not convinced it's all drugs money. If it were, this would have been happening for the last 50 years.

You could have a point about money laundering. But on this scale, it would need to have support up to government level.

reasons to launder money are not just from drugs inside Thailand.

There are massive amounts of money from around the world that wants to be laundered. Myanmar is the worlds leading producer of Methamphetamine.

Thai government complicity? absolutely.. it's called bribery. It's evident in most other areas of Thailand governance.

Is this any surprise really?

[doggie888888]

Around the same time as Pattaya

Edited March 24, 2013 by doggie888888

[HaleySabai]

money laundering. But on this scale, it would need to have support up to government level.

[true blue]

if china really gets it act together,there wont be enough condos, and shops resturants ect,to satisfy there curiosty for thaland and chiang mai in question,they seem to love it in cnx.

[Happyman108]

Guess will last at least 5-10 years before any bubble burst, even so will be droping about 10-30% max from the current value......I have seen quite a number of foreign Condo buyer paid in cash, and some small amount of Thai buyer paid cash as well. Most of these owners not mind keeping an empty unit or just rent it cheap if they need to do so.

[JomtienEats]

The recent developments in Cyprus can only be positive for Chiang Mai property.

[kaptainrob]

Much of the housing growth is fueled via debt by Bangkok residents/workers wanting a bolt-hole. eg: KKN are building 312 cast-in-situ look-alike urban slums just off the Hang Dong Road 3km's south of CNX ... BKK 'investors' are snapping them up @ 1.9 m Bt.

Easy money supply (where have I heard that before) is fueling domestic construction. Rental prices can only go down IMO, and when defaults occur there should be some nice buys around town.

As to when the bubble may burst ... no idea. Perhaps this week, if Cyprus goes belly-up

[rene123]

When will it burst? My guess is when the Chinese go home and deal with their own problems.

[bluweyze]

In my view the 2 new shopping centres will thrive and Kad Suan Keaw will really suffer (unless it finds a different niche) because Central will pull out once Central Festival is built. The condos keep seeming to find buyers, there is a lot of Bangkok money buying up as well as expats of various nationalities. In the 'moobahns' the pace of new build will match the pace of buyers. Chiang Mai is a booming city, more from inside Thailand and Asia than the traditional Western areas.The growth of Chinese tourism is hardly likely to slow during the next decade (1.4 billion people have hardly tasted tourism during our lifetimes. The economic might of China is expected to overtake USA in 2016). There will be winners and losers- that's the nature of economics but I think those expecting a massive collapse and 'fire-sales' may end up disappointed.

[THAIJAMES]

A good amount of the excess money being printed by our home countries is being brought into thailand for investment. This money is then reinvested locally by the bankers, who often provide easy money (credit) to their friends and big business partners. Basically there is an over supply of money in the world and unfortunately it is all going to people at the top.

Nothing to do with demand, they are borrowing that money while it is available. Most of the time, they structure their investments so that even if there is a collapse they will have taken their profits.

[kalbo123]

We are far away from any bubble in Chiang Mai, many people will say in a few years: why didnt I buy in 2013, when it was still cheap.

The convention center will open soon, the Chinese will come in large numbers.

Bring it on!

[USNret]

For the OP, I agree with your observations. Market forces & the laws of economics have not been suspended. Citing the South Florida market is relevant, since prices dropped by 50% in the recent real estate crash. Same with Las Vegas. When the banks stop getting their money & become insolvent, at that point it becomes impossible to sweep problems under the rug with any kind of smoke & mirrors (or dust and mirrors, as they say in CM).

Several people mentioned Chinese money, but in the meantime China is experiencing the Mother of all Bubbles. They not only have empty condos, they have entire empty cities! Expressways with no one driving, shopping malls empty, thousands of unoccupied condos -- all being bought by city-dwellers who never even come to see their new properties. I heard something like 20 new cities built each year, with no one living there. You can find video reports online. This cannot be sustained even in a regime such as theirs. When they experience their own collapse, they will not be coming to Thailand to branch out.. they will be licking their own wounds at home.

As to when... who knows? If it could be predicted, that in itself would probably cause immediate collapse. So it's just as well that it's unpredictable. I've been looking for the bubble to burst these past several years and still see no signs of a let up, only manic building & buying. I'm patient & I'm willing to sit it out as long as necessary and one of these days snap up some cheap properties.

[CobraSnakeNecktie]

To follow on USNret's point

There are quite a few smart people like Nouriel Roubini who think China is the mother of all asset bubbles.

As China's assets go then very possible or likely that Thailand's asset valuation would follow.

It could be delayed for years but a lot of bad investments in China could come home to roost. Similar happened with Japan in the 80's.

High asset valuations allowed Japanese investors to go overseas and make investments. When asset values crumbled then foreign investments were rapidly liquidated to cover domestic debts.

[BookMan]

For the OP, I agree with your observations. Market forces & the laws of economics have not been suspended. Citing the South Florida market is relevant, since prices dropped by 50% in the recent real estate crash. Same with Las Vegas. When the banks stop getting their money & become insolvent, at that point it becomes impossible to sweep problems under the rug with any kind of smoke & mirrors (or dust and mirrors, as they say in CM).

Several people mentioned Chinese money, but in the meantime China is experiencing the Mother of all Bubbles. They not only have empty condos, they have entire empty cities! Expressways with no one driving, shopping malls empty, thousands of unoccupied condos -- all being bought by city-dwellers who never even come to see their new properties. I heard something like 20 new cities built each year, with no one living there. You can find video reports online. This cannot be sustained even in a regime such as theirs. When they experience their own collapse, they will not be coming to Thailand to branch out.. they will be licking their own wounds at home.

As to when... who knows? If it could be predicted, that in itself would probably cause immediate collapse. So it's just as well that it's unpredictable. I've been looking for the bubble to burst these past several years and still see no signs of a let up, only manic building & buying. I'm patient & I'm willing to sit it out as long as necessary and one of these days snap up some cheap properties.

Quotes there being 64 MILLION empty apartments in China!

Edited March 24, 2013 by BookMan

[AnotherOneAmerican]

Much of the housing growth is fueled via debt by Bangkok residents/workers wanting a bolt-hole. eg: KKN are building 312 cast-in-situ look-alike urban slums just off the Hang Dong Road 3km's south of CNX ... BKK 'investors' are snapping them up @ 1.9 m Bt.

Easy money supply (where have I heard that before) is fueling domestic construction. Rental prices can only go down IMO, and when defaults occur there should be some nice buys around town.

As to when the bubble may burst ... no idea. Perhaps this week, if Cyprus goes belly-up

Just moved to CM and about to buy a house from KKN (Ganja-nock). Yes, the photo you have posted is a building site.

They have about 18 projects 'on the go' in CM (prices 1.8-2.5Mbht), have been building for the last 5 years, and the finished product is quite up-market.

In the projects I have visited, houses are sold as quick as they can build, with up to a 6 month waiting list.

Most of the sold houses seem to contain local Thai residents, the marketing for these houses isn't aimed at foreigners.

As to when the bubble bursts .......... exactly how much risk exposure can one have on a $60k house purchase price?

(I lost $400k on a $600k house outside San Diego purchased 4 years ago and sold recently ....... now that's a bubble!)

(I have another house in Maine I'm hanging on to for the moment, prices must get better)

Edited March 24, 2013 by AnotherOneAmerican

[SimonMrPics]

Good thread-

I've recently moved to CM, last time I was here was over 5 yrs ago- the town looks very quiet from what I remember - Im hoping that is just because not peak season?, but other friends here say its quiet for the year and a half they have been here?

So Im confused-

Town seems void of people, and buildings, and malls going up like crazy - does feel like a disconnect somewhere - although I hope Im wrong.

I suspect one reason may be because buying in CM is low risk, if one is buying with western money (or money that needs laundering), then the reduced capital cost of property encourages people to speculate. And therefore investment decisions are not submitted to as much research or rigour as bigger property investments back in the UK, USA etc. would be.

[SimonMrPics]

Sorry USNret's -

If their was a big property crash, with not enough visitors in town to support the business or property - are you really telling me your really going to rush out and snap up property?

Lots of deserted empty towns around the world, that have no demand, and rocket bottom prices - can always snap one of those up - if you think great plan. (Place in Leeds, UK, can buy property for a £1!)

[Almera]

You could have a point about money laundering. But on this scale, it would need to have support up to government level.

Now that would be surprising.

What minister had black bin bags full of millions of baht in his house again? Transport minister wasn't it.

[tpthai2]

BookMan,

Very interesting video. The "George Jao" segment is the China I recall after

spending 91'/94' in country. Every culture is driven by its own saints and demons

so to speak. And then there are in innate behavioral tendencies of the species

compounding these actions. Have the Chinese come to accept the "air" viewed

in this video? Just one thing...yes, they have. This is air.

[USNret]

Sorry USNret's -

If their was a big property crash, with not enough visitors in town to support the business or property - are you really telling me your really going to rush out and snap up property?

Lots of deserted empty towns around the world, that have no demand, and rocket bottom prices - can always snap one of those up - if you think great plan. (Place in Leeds, UK, can buy property for a £1!)

Yes, I would. It would be for me & my honey, in our retirement. I could possibly get a 2nd one, something small & simple, for her parents retirement if I could convince them to leave BKK. At any rate, I would not be buying any for investment. The only thing currently dissuading me from moving to CM is that darn smoke each year.

[hellodolly]

For the OP, I agree with your observations. Market forces & the laws of economics have not been suspended. Citing the South Florida market is relevant, since prices dropped by 50% in the recent real estate crash. Same with Las Vegas. When the banks stop getting their money & become insolvent, at that point it becomes impossible to sweep problems under the rug with any kind of smoke & mirrors (or dust and mirrors, as they say in CM).

Several people mentioned Chinese money, but in the meantime China is experiencing the Mother of all Bubbles. They not only have empty condos, they have entire empty cities! Expressways with no one driving, shopping malls empty, thousands of unoccupied condos -- all being bought by city-dwellers who never even come to see their new properties. I heard something like 20 new cities built each year, with no one living there. You can find video reports online. This cannot be sustained even in a regime such as theirs. When they experience their own collapse, they will not be coming to Thailand to branch out.. they will be licking their own wounds at home.

As to when... who knows? If it could be predicted, that in itself would probably cause immediate collapse. So it's just as well that it's unpredictable. I've been looking for the bubble to burst these past several years and still see no signs of a let up, only manic building & buying. I'm patient & I'm willing to sit it out as long as necessary and one of these days snap up some cheap properties.

Quotes there being 64 MILLION empty apartments in China!

Great video. Kind of makes it look like China is not going to be the savior here in Chiang Mai.

Is it as easy for a Chinese to move permanently to Thailand as it is for a Westerner?

[jbrain]

(Place in Leeds, UK, can buy property for a £1!)

Could you book a few for me ?

No, please I'm in a good mood, provide me with a link and I"ll buy the whole town................... and you get the pub for free.

[jackr]

if china really gets it act together,there wont be enough condos, and shops resturants ect,to satisfy there curiosty for thaland and chiang mai in question,they seem to love it in cnx.

Enough reason to get out of Dodge, right there!

[ramrod711]

I know of several apartment buildings in the KSK area where some owners have not visited there units for over a decade. Many have not paid there maintenance fees for the same amount of time. The only "penalty" they face is not being able to vote their share. If they ever impose a property tax, or start evicting people who don't pay maintenance fees in Thailand I think a lot of people will want to sell properties asap. Maybe that could be a factor in bursting the bubble.