Thailand’s Condominium Bubble a Reality or Myth
By Dr. Andrew M. Goodman
14 January 2011
Real Estate as an Investment in Thailand
Looking at real estate in Thailand, and specifically the issue of investment in real estate, it is useful to begin with valuation. Valuation is critical because we need to have an accurate gauge of the true value or worth of the property to make informed investment decisions. Without a sound basis for investing, which proper valuation will give us, we may make decisions based on emotional factors that are likely to lead us down a road that could wind up losing us hundreds of thousands or even millions of baht. Experts in the industry generally suggest a number of approaches that may be appropriate depending on the type of property purchased.
The cost approach simply looks at all of the elements that have gone into the building, such as construction materials, time spent creating the structure, lumber and cement costs, etc. These are then added to the land value to come up with a cost of the property: This can then be compared with the sale price offered.
A market comparable approach simply looks at other properties in a similar market to the desired property and compares the price. These make sense for buying residential real estate, such as a condominium in Bangkok.
If the property were to be used for rental revenues or other income such as a business, hotel etc. then an income approach would make more sense. Let us say you wanted to buy a condominium in the Asoke area but were planning on renting it out, you should look at whether the income stream from the proposed rent charge will cover the mortgage and maintenance costs, with, hopefully, a margin of profit left over. Clearly, the amount of money you are able to put down will affect this. The more the down payment, the lower the rental charges can be, while still leaving a profit. There are a number of other approaches, but for residential real estate, specifically condominiums, or homes, the above valuation methods are likely to be the most usable.
The whole notion of ‘bubbles’ in markets has been around since the dawn of investments and investment analysis itself and is critical to understanding the current market, especially in Bangkok. Some now contend that the current condo market in Bangkok is reaching ‘bubble’ proportions. According to long established conventions of market analysis, markets are generally assumed rational. In a completely rational market, ‘bubbles,’ which, by definition, are irrational price inflation episodes, usually in a single commodity, will not exist.
Burton G. Malkiel, in his signal work on markets, explains why, as a general case, prices can usually be assumed to reflect actual value. However, markets do not always respond in the way suggested by this ideal model. Bubbles, which are created when varied psychological forces drive prices of a commodity far out of their real value range, can come into existence for a number of reasons. Usually the asset assumes some sort of intrinsic or emotional value in the mind of buyers, quite apart from its actual use, this then can cause the value of the commodity in question to inflate rapidly and often far out of proportion to real or inherent value. All too soon, the realization sets in that the asset is overvalued, the market corrects itself, then, like a soap bubble or a balloon, the bubble is ‘popped.’
Prices drop, usually precipitously, as though falling off a cliff. As the prices correct themselves, there is often an over-compensation on the downside, then a settling in at a more reasonable, generally much lower, level. In the mean time, the whole process creates a lot of economic and social pain, especially for the poor lost souls who bought at the peak. Bubbles are often driven to further heights by speculation, where people get into the market not really wishing to own or use the asset in question, but merely on the assumption that they can sell it later at an inflated price and realize the gain. This speculation is in part enabled by what some in the investment community have labeled ‘the greater fool theory’.1
Historical Perspective
Historically, real estate has been considered one of the best investments to make, because the basis of real estate investment is land ownership, and this is a commodity that, as one long ago investor noted, “They aren’t making any more of.” Thus, the demand for land can, over time and given population increases, be expected to increase. However, while this may be true for long periods of twenty years or more, it is not always true in the short term. The smaller the time horizon is the more land prices can be expected to have volatility on both the down and the upside. Further, because condominium ownership does not strictly imply ownership of the land the condominium is built on (by definition with a condominium this is usually a shared asset owned by a condominium corporation, formed normally by a trust of owners, but also at times an external organization) condominiums do not strictly follow the rules applicable for real estate in general. This, however, is something that many condominium owners forget, often at their own peril.
The real estate market itself is often subject to volatile short-term fluctuations in price; caused by political factors, demand factors, demographic factors involving the movement of people, as well as the building of shopping or school facilities or transport services along with a myriad of other price impacting factors. The condominium market, not being strictly tied to the underlying land values, has even greater volatility than the more strictly land based real estate market since the stabilizing factor of the attached land value is not present. This makes the condominium market more subject to market fluctuations and the impact of ‘bubble’ factors.
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1. The ‘greater fool theory’: this is quite simply the assumption that there is in a time of rampant buying usually someone else that can be found to dump the asset on at a higher price shortly after a given buyer purchases it, thus allowing its seller to realize a quick profit. In real estate, this is labeled, ‘flipping.’ These quick transaction cycles serve to drive prices up rapidly. The greatest fools of all, in the ‘greater fool theory’ are the ones that buy at the absolute peak, often driven by the fear of missing out on the chance to take advantage of a hot market. Buy buying at the absolute peak; they get crushed financially when the market inevitably corrects itself.
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