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12 Sep 2005

Real Estate and Construction

Housing Business Outlook in the Midst of Rising Interest Rates

Of late, the driving forces behind the recent upward trend in housing business have been abating. Over the first half of this year (H1/2005), the real estate industry ? including the residential market ? has been exhibiting signs of slowdown, plagued by numerous negative factors, i.e., a slowing economy, escalating oil prices, rising inflation and the beginning of an upward interest rate cycle.

Kasikorn Research Center (KRC) has analyzed the housing industry and factors that may influence its future, in particular, rising interest rates over the next two years.

During H1/2005, housing completions in the Greater Bangkok area reached 32,400 units, a year-on-year rise of 24.3 percent. This increase could be attributed to comparison with the low base of early last year when the market saw a slump as a result of the end of the government's real estate-related incentives of tax deductions and fee reductions. Evidently, new housing completions in the second quarter of this year (Q2/2005) grew only 10.9 percent, down from the growth of 40 percent in the first quarter (Q1/2005).

Housing estate business performed poorer than the overall residential market. New housing completions within estates contracted by 11.1 percent in Q2/2005, against the growth of 37.2 percent in the preceding quarter. The slowdown in housing estate business has been seen since Q1/2005, when the number of new houses completed within estates averaged 3,132 units per month, down from 4,619 units per month in the fourth quarter of last year. In Q2/2005, the number dropped to 2,804 units per month.

Countrywide, investment in residential units during Q2/2005 grew 13.6 percent, slowing from the growth of 16.6 percent recorded in Q1/2005. This trend is poised to continue, given that housing permits nationwide ? a leading indicator for housing activities ? have been shrinking for many consecutive months.

Looking ahead, KRC has analyzed the impacts that may arise based on consumer income and household expense trends through an income index devised to reflect consumer purchasing power toward housing mortgages. This personal income index is inflation and interest rate-adjusted. KRC believes that the income level reflected in consumer home purchasing power may be on the ebb from H2/2005 through to 2006-2007, during which increases in income will be outpaced by growth in consumer expenses and funding costs for home purchases. However, this trend should improve in 2008 on the expectation that impacts from rising inflation and escalating oil prices will become less severe, while interest rates are likely to reach stability or a neutral level, thus helping boost consumer home purchasing power.

The impacts from dropping purchasing power and hikes in interest rates that may affect those who want to buy homes, as well as those who have already taken housing loans, not to mention consumer spending behavior, include:

o The impact on those who want to buy homes ? Falling income that affects purchasing power will cause consumers to be more careful in their spending, including in the decision to buy homes. Although consumers are still able to afford homes, they will have to consider future income and the saving level that they should maintain. For those who seek mortgage loans, they will have to calculate the changes in interest rates, as well. If interest rates rise by 1.00 percent, their monthly installment will be get higher by around 8 percent, which is an increment that is higher than the nominal increase in personal income, each year.

o The impact on existing mortgage holders ? Rising interest rates may cause monthly installments of borrowers to increase, respectively. And if this increased expense is higher than their increase in income, it may affect other spending or the debt servicing ability of the borrower. But, if the mortgage holder has sufficient savings, they may pay back the loan principal faster to reduce additional burdens from higher interest rates. For a house costing Baht1 million, and an interest rate increase of 1.00-2.50 percent, borrowers' overall expense in home-buying increase by around Baht100,000-200,000.

o Impact on consumers' spending ? Higher interest expense in mortgage loans may cause consumers the need to cut other expenses. Calculating from the base of housing loans of the entire financial system, estimating only the loans that are expected to be subject to floating interest rates, a 1.00 percent higher interest rate will take around Baht6 billion from consumers, or 0.15 percent of the country's private consumption value. This may cut their consumption of other goods to pay for higher housing installments.

However, KRC still views the affordability of homes even while dropping in coming phases, will still be higher than the base year ? 2002. So, it may not mean that consumers lack purchasing power to afford houses, but that their falling purchasing power may cause some prospective buyers more difficulty in deciding appropriately between spending for other goods and buying homes, as well as difficulties in the other consideration of maintaining savings for future stability.

Moreover, amid conditions where consumers are worried about negative factors that will affect their future purchasing power, partly due to oil prices and interest rates, in an adverse direction, it may be an opportunity for entrepreneurs to change strategies and stress new selling points for their housing projects, such as reduced expense in commuting (due to location), or reduced interest in housing loans. Housing projects located near mass transit rail systems will have an advantage in location. For loan proposals, some entrepreneurs have begun using the tactic of long-term fixed loan rates to attract homebuyers during the upward interest trend.

Real Estate and Construction