Finding signs of real estate bubble is one of the most difficult things because there are so many factors involved which are usually illusional and arguable.
However, since 2000, with computing power and data collection systems, economists have more information to understand the patterns and signs of a bubble. We can now see and explain the signs of a real estate bubble in 4 different stages, namely:
I have discussed 18 signs, which are sub-categorized under 4 stages, to spot a real estate bubble.
Read and understand: Real Estate Bubble (Detailed Explanation in simple words)
1. Credit Supply
The first and, perhaps, the most important sign of a bubble is Credit Supply.
Regarded as one of the most influential and greatest economists, Charles P. Kinderberger studied bubbles that has ever been seen in world’s economy history and he found one common trait in all financial crisis. And that is, bubble in all cases usually start with credit supply.
He came to a conclusion that, the size of housing bubble depends on the growth of credit supply. Credit supply is the start of bubble and it’s the fuel that inflates them as well.
Read more to understand how credit supply creates housing bubble.
housing bubble growth depends on the growth of credit supply
Credit, when given out to homeowners, becomes debt. So, by looking at the housing mortgage debt, we can know how much is the credit supply. And as, stated above, the size of a housing bubble depends on the growth of housing debt.
If we look at the stats we see that in just 10 years time the housing debt has more than doubled!. It increased by 130% from 1.66 trillion baht to 3.84 trillion baht. This rapid growth of housing debt is a clear sign of bubble, but many people don’t recognize it. People who know and understand the sign, they plan a strategy and become ready to make big time profits when bubble bursts.
Click to download Thailand Housing Debt Stats or for convenience, copy HTML code and paste this graph on your blog/website.
2. Low Interest Rate
Low Interest rates is necessary for credit supply to happen. One of the indicators to know whether a bubble is being formed or not is to look at the interest rate. If the interest rate is low, people are more willing to borrow money because interest rate is cheap. Which means that there is a demand for credit, and therefore credit supply increases. As mentioned above, credit inflates housing bubble.
When people borrow more money, which usually end up in real estate, it spurs up the price of the property.
Low interest rate also indicates that the economy needs a boost, which indicates that the economy is slow. In November, 2019, Bank of Thailand cut down interest rate to 1.25%, which is the lowest since 2009. Again, low interest rate is a strategy to stimulate the economy because people can borrow money for cheap.
The worst case scenario would be when interest rate hits 0%. In that scenario, you can be pretty sure that the bubble has already burst. For an interest rate to reach 0% is a sign of an emergency.
Source: The Bangkok Post
3. Artificial Housing Demand
This is a bit complicated but a very important issue and I found it to be very interesting as well. I highly recommend you to read and understand this phenomena.
People often misunderstand credit supply for housing demand which leads to a trend of buying property and bubble gradually gets inflated. It sounds strange but you will be amazed by how we get fooled by Cognitive Illusion. You can read about it at how credit supply creates housing bubble. It’s the same article that I provided link in the first point.
The first 3 points are the early stage signs of a housing bubble. It’s something people usually ignore and don’t care much because when bubble inflates, the economy is in the booming stage. Everybody is happy and don’t notice these signs. Bubbles usually take around 20 years to burst. So, very less people care during the early stages, and the signs are not obvious as well.
The problem here is, once a bubble is created, it’s becomes almost impossible to be stopped. A bubble is then destined to burst… someday.
A bubble is formed, now it grows. There are signs and statistics to see how fast or slow a bubble is growing. If good attention is paid to it, we can slow it down or manage it so that it doesn’t cause economic damage. To do that we need to educate ourselves and understand housing bubble better.
4. Housing Price – Household Income Ratio
Housing price to household income ratio is a good indicator whether a bubble is growing or not. If this ratio increase over time, it means that the housing price is exceeding Household Income. Which is impossible to happen without credit, and credit means bubble.
Let me explain.
Theoretically, housing price should always grow alongside household income. If it exceeds people’s income rate, housing price is suppose to drop because people can’t afford them. If housing price exceeds the household income but instead of dropping, the price continues to increase, it means that people are buying housing even though they can’t afford to. How could that be possible? How can you buy something when you don’t have enough money? Credit.
Therefore, we can track the growth of bubble by seeing the difference in housing price growth rate and household income growth rate.
In real life things are more complicated than this. There are so many factors involved hence this doesn’t provide an accurate measurement but it can definitely be a sign of a real estate bubble.
Let’s say, the average condo price increased from 100,000 / sq.m to 110,000 /sqm within 1 year. It is a 10% increase.
Now, let’s say, the average Disposable Household Income of the nation increased by 4%, there is a difference of 6%. Out of this 6%, if the nation’s inflation rate is 3%, then the remaining 3% gap is the bubble.
Let’s look at the what has been happening in Thailand for the last decade.
5. Household Debt to GDP%
Household debt to GDP is different from Housing Mortgage debt that I explained in the first point. Household Debt to GDP reflects how much people’s income goes into paying debts. The higher the debt, the higher the risk of bubble bursting. Why? This is because, people with high debt usually have low savings and they rely heavily on their current income source to pay their debts. Due to any events like economy downturn, currency fluctuations, oversupply of condos or anything causing a shortage in circulation of money will result in mass mortgage default rate that will rapidly deteriorate the economy, in other words bubble can quickly burst.
A rapid increase in household debt also indicates that there is a bubble.
Thailand has a household debt at 78.62% which is regarded has high and Thai population has the 11th highest household debt in the world as of 2019.
Thailand is still in a worrisome situation because it is believed that next year Thailand’s GDP is expected to lower. Since, Household Debt to GDP is calculated by the formula
Household Debt% = Debt / Income
If income decreases, Household Debt% will increase (even without taking more credit). Therefore, with higher Household Debt-to-GDP rate, the rate of mortgage defaults will increase moving us closer to real estate bubble bursting.
6. Sub-Prime Loan
Here lies a dark secret that the general public don’t know. Investment bankers usually sell mortgage debt bonds to investors. For that they need to sell mortgages and convert them into bonds to sell to investors. Since, mortgage is the raw material for these bonds, they tend to give out easy loans to people who don’t deserve it. This usually happens during mortgage debt funds boom.
When the demand for debt funds from investors increase, lenders sometimes give out loans to people who don’t deserve loans or have low credit score called subprime loans.
You might have heard of a scheme in Thailand where the buyer gets housing loan plus cash on buying a condo or sub-prime loans (called คอนโดเงินทอน in Thai language). This inflates the bubble. How does it inflate a bubble? Lenders usually want to get high mortgage amount, so that they can convert more into bonds, for that they need more volume of credit. One technique that they use is to overly set the price of houses, provide loan more than the housing price and give cash to the buyers for the excess amount.
So, if a condo is worth 1 million, they will show the price to be 1.2 million, and give 120k cash to the borrower. This way they can increase the mortgage by 20% and hence, 20% more on debt bonds.
Below is an example of Line messages that are secretly shared and circulated in online world through mortgage agents.
You may be wondering, why would lenders want to give loans to these people. Find out the answer at คอนโดเงินทอน
7. High Demand For Mortgage Debt Funds
Investment bankers sell mortgage debt funds/bonds to investors. The raw material to create these funds is mortgage. Which means that lenders must find people to buy home and take mortgage from them.
When the demand for bonds is high, lenders need to sell more mortgages which make them give easier loans to homeowners. The easier the loan, the higher chance of low quality loanee, which means lower income people taking more loans and the overall household debt increases and default rate also increases that eventually leads to bubble bursting.
With high demand for mortgage debt funds, it is likely that subprime loans are being given out. This usually happens secretly through a network of agents and sales people, and not through marketing or advertisements. For example คอนโดเงินทอน
8. Increased Advertisements of Selling Debt Funds.
Investment bankers have data and they know the true situation of the market. If they see that the risk of bubble increases to a worrisome level, they tend to speed up in selling out these mortgage debts in the form of bonds. Because if they hold on to it and the situation gets worse, investors won’t buy mortgage debt funds. Investment bankers will then face big risk of bankruptcy when bubble bursts.
3Matured Stage Bubble
9. Decrease in Rent-to-Price Ratio Rate
At the beginning stage, the price and rent of the property usually go hand-in-hand. But then a point comes, when a proper bubble is already formed and the market situation start to go into an oversupply. This is a point where the rental price starts to drop because vacancy rate increases and owners lower their rents to fill up their condos.
10. High Household Debt-to-Income Ratio
Rapid increase in Debt-To-Income ratio or DTI% is a sign of a bubble being formed. A high household debt or high DTI% achieved, is a signed that a bubble has already been formed.
In a normal man’s life, his biggest debt is usually the debt of buying a house. Here, we will compare Thailand’s household debt to Housing Mortgage Debt for comparison how much housing debt is responsible for the total debt of the population.
12. Lowering of LTV Rate
LTV (loan-to-Value) is a barrier to entry to stop people who have low net worth from buying a property because they have a high chance on defaulting.
High LTV is not an indicator of a bubble but is usually a reason for a bubble to form. This is because with high LTV rate, it is easier for people to buy condo even though they cannot afford to. So, it becomes easy for them to buy using debt.
With low barrier to entry, more and more people get into debt. This is why BOT’s has a new LTV measurement to make it more difficult for people to buy a property. When BOT (Bank of Thailand) announced the new measurement for LTV, it became obvious to the public that the economy is in a sensitive period and there is a chance for a bubble to burst.
13. Housing Price Decline
When real estate bubble is close to burst, you will start seeing property price drop. Which we are already experiencing and you can see the red line in the graph as well. The decline of housing price is usually due to oversupply market and lack of purchasing power (no demand). There is less demand in the market so property price starts to fall.
Other reason for pricing drop is due to high NPL. When more people start to default on loans, they rush to the market to sell their condos and they compete by reducing their asking price due to shortage of demand in the market. Housing price decline and high NPL is a strong indicator of real estate bubble maturing and edging towards a blast.
The red line in the graph shows a sharp drop of condominium prices since January, 2019. It is likely to drop further due to various circumstance that is happening right now.
Source: Bank of Thailand
14. Condo Supply & Absorption Rate (Oversupply)
When the number of condos built can’t be sold, and is left unsellable in the market due to no demand, it is then said that there is an oversupply of condos in the market.
Whether the market is in an oversupply or not, experts usually measure them by Absorption rate (which is an irrelevant way of measuring). Let’s say a 100 condo is built and 90 of them are sold, the absorption rate would be 90%, which is good.
When investors see high absorption rates, they have confidence in the market and want to invest. This is one of the biggest mistake investors make.
When condos are built, and sold, let’s say at 90% absorption rate, you will see experts and news say that the market is not in an oversupply because of high absorption rate. This information is incorrect and not relevant because absorption rate is an irrelevant way of measuring for investors, it is only relevant to developers. Absortion rate indicates whether a newly built condo would be able to sell or not during that particular period time. An investors buying a condo, holds it it for years, and will eventually run into an over supply market. Therefore, its not relevant to investors.
It only becomes relevant in the later stage of oversupply. But during the early stage of oversupply, absorption rate cannot and does’t reflect whether or not the market is in oversupply. It is the vacancy rate that truly reflects if there is real living demand in the market or not.
Let me explain it you this way. Imagine a 500 unit condo is built. 300 homeowners bought to live while the remaining 200 units were bought by investors. So, all 500 units are sold. Absorption rate is 100%. This information is usually broadcasted out and people believe that the condo market is really good. There is high demand and is definitely not an oversupply market.
It turns out that only 400 units in that building were occupied. 100 units remained vacant because investors couldn’t find any tenant. There is simply no demand. Therefore, actual live-in rate is only 80%, and vacancy rate is 20% but absortion rate showed 100%!! Actual live-in rate truly reflects whether the condo is in oversupply or not. Because oversupply means, the number of units available is more that the number of demand to live it. Unfortunately, many times, absorption rate is understood wrongly by investors in condo investments.
Oversupply is an indicator of a bubble, it sets bubble up to burst but it doesn’t trigger a bubble to burst (if a bubble really exist and a high household debt or DTI% is present). To understand more, read DTI%
Oversupply is one a trigger. When oversupply happens bubble is already triggered and it’s only a matter of time when the bubble burst. This is the time where officials, developers, bankers, and insiders start to panic.
Developers usually come up with crazy offers and promotions. Bankers pump in their advertisement budget to sell out mortgage bonds, so that they are not affected anymore. And a lot of things happen. This is the time when public is kept in the dark, because if the public knows, they won’t buy anything. To understand how Oversupply triggers, read here.
Vacancy is the consequence of an oversupply market. This is one of the most vital real estate information an investor can have to be able to decide their next move but it is extremely hard to find out whether a condo is occupied or vacant. Imagine, if anyone buys a condo today, how would you track or know whether he moved in or rent out. If it’s for rent, how does anyone know whether the investor in struggling to find a tenant and is facing the bitter part of an oversupply market. It’s quite difficult to these facts.
The Department of Electricity and Bank of Thailand, made a joint research campaign to find out the actual number of condo occupied in order to find out he vacancy rate. They do it by looking at the number of condos that use electricity in each month. It is a very interesting finding and I used those information to write about oversupply of condos in Bangkok.
Unfortunately, the collaboration was made between 2013 to 2017 and we do not have the data for 2018 and 2019.
From the graph below, you can see that the average occupancy rate of condominiums in Bangkok and vicinity is quite high. An important point to be noted that these numbers are like to drop down over time as developers continue to build more and more condos at neck breaking speed.
Also, for the year 2015 and 2016, the move in rate is higher than 100%, that is because people bought their condo before 2015 and moved in later.
Source: Bank of Thailand
16. Government Stimulus Program
If there is one thing that can increase the speed towards bubble bursting, its panic. When people panic they start to save up money, stop investments, stop spending. This quickly stops the economy mechanism and the economy collapses.
That is why when the government do some stimulus program they will give some name to the purpose. For example, the Thai government has given a thousand baht “gift” to 10 million Thai citizens.
GHB (Government Housing Bank) has given special discount on interest to Thai people who wants to buy a house with special interest rate of 0.01% on mortgage for the first year. And they put a budget of 25 billon baht for this campaign so that Thai people have a home of their own.
Recently, Thai government has also reduced property transfer tax from 2% to 0.1%. These are the clear signs that the government is desperate for people to buy property so as to stop it from dwindling down.
17. NPLs Rate in Housing Sector
NPL (Non Performing Loan) is the amount of loan or mortgage taken by house/condo buyers but default on payments. The data that has been show here is the NPL in housing sector only. That is, its the non-performing loan taken for buying house and condos only.
The blue line, shows the rate at which NPL has been growing on an yearly basis. Since 2013, NPL has been growing at an average rate of 15.8%. That’s a very high number.
Total NPL is also high at 81,490,000,000 baht. But here is the most interesting part, and the scariest as well. From 2014 to 2018, just 4 years, NPL has doubled in amount. By 2020, there is a good chance that the NPL triples. That’s an alarming rate. It’s very high!
Thailand’s NPL doubled in just 4 years
Why is NPL grow fast? Something is definitely going on. High NPL rate is one of the clearest sign of a real estate bubble high growth or even on the verge of bursting.
Knowing this, why are banks still coming out with promotions to give cheap loans to lower net worth people. And why is the government giving incentives to drive more people to buy house/condo? Stimulating the economy by encouraging people to get into debt is a short term fix and long term disaster (which won’t be very long from now.)
Want Thailand’s NPL data for your blog/news?
- Embed graph in your blog/website
- Download Thailand Gross NPL in Housing Sector Data in Excel
18. Foreclosure Rate
If you understand what real estate bubble bursting means, this graph will put you on high alert. When a bubble breaks, the number of properties foreclosed increases rapidly, to a point it goes into an exponential growth.
Source: Legal Execution Department (กรมบังคับคดี)
The graph here confirms that the bubble is not burst yet but the rate at which it is growing is very high and no doubt, with this rate, bubble will burst, most probably in 2021. That’s my own personal opinion.
bubble is not burst yet but the rate at which it’s growing is very highAdithep Chawla
Just have a look. In 5 years time, from 2014 to 2019, the total value of foreclosure has doubled! That is a very big statement.
In the last 5 years, housing debt has doubled, NPL has doubled and now, foreclosure has doubled. This is ridiculous.
In the last 5 years, housing debt has doubled, NPL has doubled and now, foreclosure rate has doubled. This is ridiculous!Adithep Chawla
18. Big Promotions by Developers
Just notice the promotions and ads by developers, you will sense how desperate they are to clear their stock. It’s a simple and clear sign of oversupply market leading to a real estate bust sooner or later.