Tris warns of short-term impact from central bank measures

The Bank of Thailand’s macro-prudential policies meant to improve mortgage lending quality and curb rampant search-for-yield behaviour in the residential market could have negative impacts on property developers in the short run, says Tris Rating.

However, the move will benefit homebuyers, property developers and banks in the long term.

The central bank uses risk weight guidelines to control mortgage lending. The risk weight assigned to mortgage loans is only 35% if the loan-to-value ratio (LTV) is less than 95% for low-rise residential property units, 90% for high-rise units and 80% for housing units priced at over 10 million baht.

If the LTV ratio exceeds these guidelines, the risk weight will increase to 75%. Top-up loans are not included in the calculation of the LTV ratio at present. A top-up loan is a loan made to a property buyer on top of the mortgage.

In practice, top-up loans are often bundled together with mortgages, meaning the money lent to a property buyer can exceed the LTV ratio cap.

Under the new measures proposed by the central bank, LTV limits will be applied to mortgage loans instead of the risk weight guidelines. In addition, the loan value used to calculate the LTV ratio will include mortgage loans and any top-up loans linked to the same collateral.

The LTV limits for mortgages for the first housing unit purchased by a homebuyer will remain unchanged but are capped at 80% for mortgages for second and subsequent units acquired by the same purchasers. This lower level matches the LTV ratio for housing units priced at more than 10 million baht.

Tris said the measure lowering the LTV limit to 80% for second and subsequent homes priced at less than 10 million baht will affect buyers and property developers the most.

Generally, residential property developers require down payments of 10-15% for housing units priced below 10 million baht. If the LTV ratio drops to 80%, homebuyers will have to put up 5-10% more of the purchase price when they make a down payment.

Based on the portfolio of 21 developers rated by Tris, housing units priced below 10 million baht make up 90-95% of the units available for sale and 75-80% in terms of value.

Central bank statistics show that new mortgage loans used to purchase a second home or additional housing units account for about 20% of those provided by commercial banks. Tris estimates that if 70% of homebuyers borrowed money to make the purchase, 15% of them would be buying second housing units priced at less than 10 million baht, which is a group directly affected by the proposed measures.

The impact in terms of value would be slightly lower: 10-12% of total sales.

“We believe condo developers will feel the bite from the change more than low-rise housing developers,” the rating agency said. “The measures will have a greater effect on developers that have more projects completed in the next one to two years.

“These developers may face some delays when transferring the finished units to buyers because domestic buyers may have difficulty securing a mortgage. Delays in transfers will reduce the revenue developers can recognise in the next couple years.”

The reduction in the LTV ratio should discourage speculation in the property market. If a speculator must make a larger down payment while a property is still under construction, the returns for the speculator will fall.

Speculators also face a greater risk of losing money if they cannot sell the unit to another buyer before construction is complete and the units are ready to be transferred.

“We anticipate rated developers will shift their focus towards foreign buyers, especially Chinese investors,” Tris said.