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25 Apr 2006

Real Estate and Construction

The Economy & Interest Rate Hikes, 2006: Impact on the Housing Industry

In the midst of numerous negative factors and uncertainties plaguing the Thai economy, KASIKORN RESEARCH CENTER (KResearch) has analyzed the impacts that these inhibitors may have on housing demand. With the prevailing economic uncertainties in 2006 and rising interest rates, demand for residential units may grow at a decelerating rate.

Broadly speaking, Thai economic growth may be similar to what was seen last year. It is projected that economic growth may achieve 4.0-5.0 percent, while inflation, gauged by price levels, may be as high as 4.0-4.5 percent in 2006, close to the 4.5 percent of last year. Interest rates at commercial banks are nearing their peak, lagging behind the Bank of Thailand's policy rate that is expected to peak at 4.75-5.00 percent during the first half of this year. This year's upward inflationary pressure and rising interest rates may deal a blow to housing demand. Worse, possible hikes in the prices of construction materials and energy costs in 2006 will inevitably affect the prices of new homes. Meanwhile, housing developers may be confronted with increased operating and funding costs, which may thus narrow their profit margins. At the same time, the announcement of the new City Plan law, replacing existing regulations that will expire in July 2006, will also raise the operating costs of residential developers. Under the new law, more open space has to be allocated, and land in some areas may face restrictions on project development.

As far as estimates go, KResearch forecasts that the number of housing projects may drop further to some 34,000 units, falling another 5.4 percent from the 11.8 percent drop seen in 2005. At the same time, custom-built residential units and condominium units may decelerate somewhat to total some 26,000 units and 11,000 units, respectively, representing growth by 3 and 10 percent. This will, therefore, put the figure for overall new housing units of all types slightly lower than last year.

The value of the housing market nationwide may grow slower. It is anticipated that the construction value of residential units in 2006 will total THB230 Billion, compared to THB200 Billion in 2005, at constant prices would represent a growth of 8 percent in 2006, against the growth of 13 percent in 2005.

The decelerating demand in the housing market may likewise result in total housing loans of the entire system growing slower. It is projected that the outstanding balance of housing loans at the end of 2006 may have a value of around THB1.335 Trillion, which would translate to 10 percent growth, decelerating from the growth of 15.6 percent at the end of 2005.

In 2007, the economy will have a chance to move in a better direction if pressuring factors affecting domestic demand such as the price levels of goods and interest rates have declined to the extent anticipated, where inflation may slow to 3.0-4.0 percent, though interest rates are likely to remain stable or fall in 2007. If the economy recovers and consumers' incomes grow faster than their expenses, purchasing power toward residential units may improve slightly in 2007.

However, economic recovery in 2007 is still threatened by important risk factors such as internal and external political conflicts. The external factors include the tensions in the Middle East and the problem of Iran's nuclear development program, which may be factors that inhibit stability in global economic growth, particularly because of the impact of those risks on oil prices. Meanwhile, domestic politics may remain uncertain until after new general elections and there is a new and permanent government to run the country in the latter half of 2007.

Real Estate and Construction