Because of the fear of another property bubble, the Bank of Thailand (BOT) has recently launched a campaign to decrease the loan to value (LTV) ratio for second-home buyers. According to Prasarn Trairatvorakul, BOT governor, the number of property loans is currently at an alarming level, which can result to a real estate bubble anytime soon.


Lower Loan Amounts 

Currently, commercial lenders are forced to maintain an LTV ratio of the following: 95% for detached homes, townhouses and low-rise residents; and 90% for condominium units. To prevent the creation of a real estate bubble, the BOT is contemplating of deducing the LTV ratio for second-home buyers to 70-80%. Because of this measure, clients will have to shell out a down payment amount of 20-30%. This activity by the BOT will most likely affect homes costing THB 10 billion or less, since costlier homes already follow the LTV ratio of 80%. However, the LTV ruling for second-home buyers is slated to have little effect on customers, according to Srettha Thavisin, Sansiri Firm President. This is because most clients who purchase such homes usually pay in cash, he adds. However, Thavisin expressed concerns about the measure, because speculations of such can lead to the panicking of buyers and investors as well.


Lower LTV Ratio: Pros and Cons 

Despite the fact that the ruling is said to have only a small effect on buyers, research conducted by Asia Plus Securities shows that the reduction in the LTV ratio to prevent speculation can actually keep the property market healthy and afloat. Unfortunately, it would adversely affect the profits of real estate companies. Because of this dire consequence, the research has several suggestions for the BOT. For one, in case the BOT decides to escalate the LTV requirement, Asia Plus Securities proposes that it should only be applied to new construction projects and not the on-going ones. By doing so, it can soften the financial impact that the increased LTV ratio might have on real estate companies. Unfortunately, manipulation of the existing LTV ratio will definitely have negative effects on buyers and real estate developers alike. However, the BOT feels that such measures need to be done in order to prevent the onset of another property bubble, which has devastated the economy of Thailand greatly from 1996 to 1997.


Tighter Measures

Apart from the modification of the LTV ratio, the BOT has also commanded commercial lending companies to be stricter when it comes to housing loans. For example, the Kasikorn Bank is tightening its credit lines – giving more opportunities to bigger companies with stellar track records, and limiting the loans of new and small developers. Presently, second-home buying transactions correspond to 20% or THB 300 billion of the total home sales every year. Half of the contracts are usually taken in by investors who wish to earn money through rentals, while the other half corresponds to buyers who flip properties for additional income. While the modification of the LTV ratio might be harmful for some, the BOT hopes that this can prevent the onset of a damaging property bubble, which Thailand has suffered from in 1996.