The Bank of Thailand to check property market

The Bank of Thailand will hold a consultation to discuss the “search-for-yield” behaviour prevalent in the property sector with relevant parties because it could lead to higher risk of default in mortgage loans.

The central bank found this behaviour is widespread, especially in high-rise condominium projects, said governor Veerathai Santiprabhob.

Such behaviour reflects an oversupply in some condo areas, resulting in artificial demand and higher non-performing loans (NPLs) in the mortgage segment, said Mr Veerathai.

“We also found several marketing campaigns for residential projects are promising cashback, high rental yields or other [incentives that create artificial demand]. These are search-for-yield and speculative behaviours, and the central bank will discuss controlling risk with related parties,” he said.

“If a macro-prudential measure is needed to supervise mortgages and control search-for yield behaviour, we will announce it officially.”

Mortgage NPLs rose to 3.39% in the second quarter, up from 3.38% registered in the previous quarter, according to central bank data.

The central bank has used a micro-prudential measure by informing financial institutions to tighten mortgage loan approvals under the basis of good risk management.

Earlier, the central bank raised concerns over higher competition in the housing loan market, especially higher loan-to-value (LTV) offered for mortgage loans.

The central bank’s Monetary Policy Committee and Financial Institutions Policy Committee previously reported after a joint meeting that there was a higher ratio of new mortgages, with LTV rates exceeding 90%.

The increasing loan-to-income proportion and deteriorating mortgage loans all point toward fragility in the residential property market. Under the financial regulator’s guidance, the LTV ratio is set at 90% for low-rise residential projects and 95% for high-rise projects.

Separately, Nathapol Luepromchai, executive vice-president and head of mortgage loans at Bank of Ayudhya, said banks have discussed and shared information about the search-for-yield behaviour during meetings at the Thai Institute of Banking Finance Association.

Each bank has prevented risk exposure by tightening loan approvals for what it deems as artificial demand, said Mr Nathapol.

If the central bank holds a consultation, this would facilitate information-sharing between the financial regulator and banks as a means to control risk, which would benefit the overall property industry as well as homebuyers, he said.

“After seeing such behaviour for around a year, it would be reasonable for the [central bank] to implement a macro-prudential measure, setting an exact LTV ratio rather than [providing] guidance,” said Mr Nathapol.

Rising mortgage NPLs are a result of an artificial demand and speculation rather than economic conditions, he said.