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Striking a Balance Between Real and Speculative Demand

By on Mar 15, 2010 in Property News

Written by Aliwassa Pathnadabutr, Managing Director of CB Richard Ellis Thailand and Published on The Nation dated 15 March 2010.

With the strengthening of the local and global economies, the Bangkok property market has been active, with new project launches well received, many of them selling out within days.
At fringe locations surrounding central Bangkok, 7,441 units in 11 projects were launched in last year’s fourth quarter, up from only 494 units in the third quarter. While this is  a sign of a booming property market, it also increases concerns about oversupply and a price bubble.
Most of the units launched were either studios or one-bedroom units ranging from 28-40 square metres. This is also the product segment that is most prone to speculation, given the low unit price and down payment.
The critical question is: who are the buyers? I believe the demand is underpinned by a combination of real end-user demand and speculation. In any growing property market, it is difficult to avoid speculators.
Aggressive marketing campaigns can make people decide to buy based on their emotions rather than real investment needs. Speculative demand accelerates price increases, with the market potentially exposed to a price bubble and oversupply. Thailand should reflect on the market and avoid the previous mistakes that were made in the lead-up to the 1997 Asian crisis.
Let’s take a look at other markets in the region that are also experiencing strong demand and price growth in the residential sector – Beijing, Shanghai, Hong Kong and Singapore – and what they are doing to prevent a bubble.
China is one of the world’s fastest-growing economies and most inclined to speculative property demand, because the market is experiencing strong growth. Transaction volumes of luxury residential properties in Beijing were up 38 per cent and prices 10 per cent quarter on quarter: More than 15,000 luxury apartments were sold in Beijing last year, up 152 per cent from 2008.
Shanghai has experienced similar price increases, with transaction volumes between last October and November triple those in the same period of 2007, the previous peak. To prevent a bubble, the government is now implementing measures to regulate the market, including withdrawing preferential treatment for business tax payable on second-home residential transactions, tightening lending for second-home buyers, increasing the down payment to as much as 40 per cent and imposing higher interest rates on mortgages. Similarly, Hong Kong property prices have rebounded 48 per cent year on year, and the price escalation has prompted the government to announce measures to curb the overheating in the high-end residential market. From April onward, the government will increase the stamp duty levied on sales of units worth more than Bt84 million.
In Singapore, an additional tax has been imposed on those who resell their residential properties within a year of purchase.
While Thailand’s residential market is not driven primarily by speculative demand, some segments are prone to speculation. To sustain consistent and long-term growth in all segments, the industry should observe and learn from other mature markets.
For now, Thailand is relatively safe from a price-bubble situation. While other key Asian markets have turned the corner in the last 12 months, unfortunately Thai property prices have been depressed by the local political situation. Looking forward, provided that Thailand overcomes its political impediments, prices are well positioned for further growth. However, it will be critical for policy-makers to monitor and ensure a balance between providing support to the market and having measures in place to control supply and speculation.

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