Real Estate Challenges: Higher Rates, Borrowing Constraints

According to the Real Estate Information Center, higher interest rates are anticipated to impact purchasing power and make it more challenging for homebuyers to obtain loans. This is compounded by the upward trend in credit rejection and the persistently high levels of household debt, which remain above 80%.

Impact of Higher Interest Rates and Credit Rejection 

During a recent Monetary Policy Committee (MPC) meeting, held on March 29 under the designation No. 2/2023, the committee reached a unanimous decision to implement an immediate increase in the policy rate by 0.25% per year, elevating it from 1.50% to 1.75%. This noteworthy development reverberates throughout the real estate sector, introducing profound implications for various stakeholders. 

Shedding light on this decision, Mr. Wichai Wiratkapan, Inspector of the Government Housing Bank and Acting Director of the Real Estate Information Center, provided insights into the meticulous alignment of their property market forecast model with the prevailing intentions of the US Federal Reserve to elevate interest rates, primarily as a measure to exert control over inflationary pressures. Notwithstanding the evident signs of economic recuperation and the encouraging progress witnessed in consumer spending, the lingering presence of elevated core inflation levels presents inherent risks. It is against this backdrop that the decision to raise interest rates emerges, guided by the belief that the overall impact will be contained within manageable bounds. 

Nonetheless, the real estate sector finds itself grappling with substantial adverse consequences stemming from the ongoing upward trajectory of interest rates and the reintroduction of Loan-to-Value (LTV) measures. These measures, designed to curtail borrowing capacity and impede property transfers for prospective buyers, weigh heavily on the industry, limiting its growth potential including curtailing the ease of market transactions.

Challenges and Constraints Faced by the Real Estate Market 

Given the recent surveys indicating that a majority of homes including condo purchases were motivated by investment objectives or for second homes, the real estate market is expected to maintain stability or potentially experience a negative trend throughout the year, particularly in the presence of unfavorable factors. This projected outcome is further compounded by the significant impact that Loan-to-Value (LTV) measures are likely to have, primarily affecting condos and houses as interest rates rise. Consequently, borrowers who aim to secure the same loan amount will face higher installment payments, while those opting for the same installment will encounter reduced loan amounts, thereby introducing challenges and constraints.

Moreover, the increasing interest rates pose significant obstacles to homeownership, exacerbating the gap between interest rates and the purchasing power of individuals who are still recovering from economic setbacks. These challenges are intensified by the mounting number of credit denials and also persistently high levels of household debt, surpassing the 80% threshold. Collectively, these factors paint a less optimistic outlook for the real estate market, presenting difficulties for potential buyers and influencing the overall market performance.

To address the issue of high inflation, Mr. Khajornsit Singsaensern, the President of Siamese Asset Public Company Limited, emphasizes the importance of implementing gradual increases in interest rates. This approach aims to mitigate the adverse effects on purchasing power, as lower purchasing power hampers potential buyers' ability to afford homes at their desired price points. Consequently, this situation leads to extended loan periods and higher installment payments for homebuyers, while real estate developers face the challenge of increased interest costs resulting from these circumstances.

Similarly, Mr. Prasert Taedullayasatit, the CEO of Ananda Development Public Company Limited's Real Estate Business Division, sheds light on the significant impact of interest rate fluctuations. Under normal circumstances, a 1% increase in interest rates translates to a 7-8% rise in the average customer's repayment amount. However, in the current climate where banks adopt more conservative lending practices, a 1% interest rate increase has a more substantial impact, affecting customers' repayment capacity by 8-10%. This situation directly influences the demand side of the real estate market, posing challenges for both buyers and developers alike.

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