Thai Economy and Interest Rate Trends in 2022

As of now (August 2022), there have been approximately 586 million cumulative COVID-19 infections worldwide, with a death toll of about 6.5 million. In Thailand, there have been around 4.6 million infections and approximately 31,800 deaths. However, due to the new variants posing a lower risk of death and the necessity for economic recovery, governments worldwide, including Thailand, have eased travel restrictions and allowed businesses to operate more freely, resulting in increased employment. The National Economic and Social Development Council projected at the beginning of 2022 that GDP would grow by about 3.5-4.5%. However, it has recently revised the annual figure down to 2.7-3.2% due to the ongoing impacts of the Russia-Ukraine war.

In the second quarter of 2022, the economy expanded by 2.5%, following a 2.3% growth in the first quarter. Compared to the entire year of 2021, which saw a GDP growth of 1.6% from 2020, this growth is attributed to the government's full-scale reopening policy and the increased freedom of travel in many countries. Tourism, transportation, agricultural exports, and private consumption have all improved, indicating a partial recovery from the previous year's contraction of 6.1% (though still not reaching the pre-pandemic levels of 2019).

At the same time, the Russia-Ukraine war has led to rising oil and energy prices, and the disruption of supply chains due to the conflict has caused consumer goods prices to increase, resulting in heightened global inflation. In Thailand, the general inflation rate (Leadline Inflation) in July 2022 rose by 7.61% compared to July 2021, primarily driven by a 33.82% increase in energy prices from the same month last year (up 39.97% from June). Previously, in June 2022, the general inflation rate had already risen sharply by 7.66% compared to June 2021, marking the highest rate in 13 years. The Ministry of Commerce has revised its average inflation forecast for the entire year of 2022 to 5.5-6.5% (up from the previous forecast of 4-5%). Meanwhile, core inflation, excluding volatile food and energy prices, increased by 2.99%, which is not significantly higher than the previous month's increase of 2.51%. This is due to the Ministry of Commerce's price controls. The U.S. Federal Reserve raised its policy interest rate by 75 basis points to 1.50-1.75% after inflation in the U.S. rose by 8.6% in May 2022, the highest increase in a decade. The ongoing inflation trend suggests that the U.S. policy interest rate may rise to 3.25-3.50% by the end of 2022.

The Monetary Policy Committee has raised Thailand's policy interest rate in its August 2022 meeting from 0.50% by an additional 25 basis points, with a likelihood of further increases of 25-50 basis points within this year. The gradual increase in the policy interest rate will affect reference rates such as MOR, MLR, and MRR, subsequently impacting housing loan interest rates. Financial institutions have indicated they will maintain housing loan interest rates at the current level until the end of 2022 (previously, the policy interest rate was reduced from 1.25% at the end of 2019 to 0.50% at the end of 2020 and has remained at 0.50% until the recent adjustment). Household debt remains high, with household debt at 90.1% of GDP at the end of 2021, and households have seen a decline in savings, with the average Debt Service Ratio (DSR) for Thai households remaining around 30% since 2019, increasing beyond 30% after the COVID outbreak as households borrowed to compensate for lost income. However, when categorizing the debt, it is found that 34.5% is for real estate purchases, 12.4% for vehicle purchases, 18.8% for business operations, 27.8% for personal consumption, and 6.4% for other loans.

Debt for real estate purchases is secured debt, while business operation debt arises from borrowers' attempts to generate future income (which will enhance their ability to purchase real estate). Together, these two types of debt account for only about 53.3%. Therefore, monetary policy should support increased lending for these two types of loans and reduce the proportion of other types of loans to benefit the economy and society.

Housing Loans in 2022

Housing loans from state banks remain a key driver of the housing market, as state banks have a mission to support housing loan projects for low- and middle-income earners, such as the One Million Houses project through the Government Housing Bank, which launched its second phase on September 10, 2021, with a deadline for legal transactions set for December 30, 2022, allowing loans of up to 1,200,000 baht with a repayment period of no less than 7 years and no more than 40 years.

In the first half of 2022, financial institutions collectively issued housing loans amounting to approximately 311.5 billion baht, an increase of 5.6% from about 295 billion baht in the same period of 2021 (the total for 2021 was approximately 612 billion baht, the same as in 2020, while 2019 saw about 640 billion baht, and 2018 had a record high of approximately 702 billion baht).

The Government Housing Bank, which accounts for about 43% of new housing loans in the first half of the year, reported that it has issued loans amounting to approximately 135 billion baht, a 27% increase from the same period in 2021. It is expected that by the end of 2022, it will issue housing loans up to 280 billion baht, the highest in all previous years, indicating that the real estate market in the low to medium price range remains in demand and continues to expand. Additionally, another positive factor is the expansion of the price range for the One Million Houses project Phase 2 from a maximum price of 1.2 million baht to 1.5 million baht, with a fixed interest rate of 1.99% for the first four years, increasing opportunities for homebuyers.

For general housing loans outstanding at the end of the second quarter of 2022, the value was approximately 4,596.5 billion baht, an increase of 5% from the end of the second quarter of 2021, compared to approximately 4,501.5 billion baht at the end of 2021 and approximately 4,255 billion baht at the end of 2020. The fact that the growth rate of new loan disbursements in the first half of this year (5.6%) is higher than the growth rate of outstanding loans (5%) is a positive sign indicating that the housing loan market and the housing market are experiencing good growth.

Government Housing Policies in 2022

The Bank of Thailand has relaxed the criteria for considering housing loans, with the Loan-to-Value (LTV) ratio effective from October 2021 until the end of 2022 set at 100%. Financial institutions can issue loans up to the full value of the property being used as collateral, covering both new and second-hand homes. The Property Valuation Committee for State Benefits announced in November 2021 that a new property valuation account would take effect on January 1, 2023, while the previous valuation account from 2016-2019 will be used in the meantime. Previously, the Treasury Department had postponed the implementation of the new land valuation several times from early 2020 to early 2023 (or the end of 2022). The Cabinet decided in December 2017 to maintain the land and building tax rates under Section 94 for another two years, in 2022 and 2023. However, this decision only reduces the collection rate at the same level, meaning it reduces from the ceiling rate under Section 37 but does not decrease by 90% as per Section 55.

The Cabinet also approved in December 2021 the extension of the measures to reduce transfer and mortgage fees from the original deadline at the end of 2021 to the end of 2022, now including second-hand homes. The transfer fee for real estate ownership has been reduced from 20,000 baht per million to 100 baht per million, and the mortgage fee for residential properties as collateral has been reduced from 10,000 baht per million to 100 baht per million for the purchase of single-family homes, duplexes, townhouses, commercial buildings, or land with buildings or condominiums registered as condominiums, with purchase prices and asset valuations not exceeding 3 million baht and mortgage amounts not exceeding 3 million baht.

Transportation Projects in 2022

The construction of key mass transit projects, particularly the Pink, Yellow, and Orange lines, has been delayed, resulting in missed opportunities to stimulate the real estate market along these routes in 2022. However, with the opening of the Pink and Yellow lines in 2023 and the progress of the Orange line, transportation will become more convenient, and the real estate market along these routes will have opportunities for further growth. Reports indicate that the construction of the Purple Line extension from Tao Poon to Rat Burana is set to begin (after the Cabinet approved the construction back on July 25, 2017, five years ago), starting at the area of Samsen Road in front of the National Library, and is expected to take at least 3-4 years to complete.

Private land along this extended subway line will see further increases in value as construction progresses, even though there have already been increases previously.

Housing Market in 2022

In 2022, it is expected that a larger number of new housing units will enter the Bangkok and surrounding areas market compared to 2021, as the volume of new launches over the past two years has been relatively low, especially for condominiums, which saw a total of only about 51,300 units launched in 2020 and 2021 combined, compared to the normal annual average of about 60,000 units. It is anticipated that more than 45,000-50,000 new condominiums will be launched in 2022, along with approximately 35,000-40,000 new housing projects, particularly in the outer areas of Bangkok and surrounding provinces, which continue to attract interest and demand for single-family homes, duplexes, and townhouses.The housing market has shown clear signs of recovery in the first half of 2022, with many developers reporting improved sales and the housing market benefiting from more favorable conditions.

In the first quarter of 2022 alone, approximately 31,500 new housing units were launched in the Bangkok and surrounding areas, more than doubling from the same period last year, comprising about 20,500 condominium units and approximately 11,000 housing projects. When combined with the second quarter of 2022, the total number of new launches exceeds 50,000 units, with 60% being condominium units. The total number of units and project value in the first half of 2022 is close to the total for the entire year of 2021 (which had the lowest new launches in over a decade). Before the COVID outbreak, an average of about 60,000 new condominiums were launched annually.

In comparison, in 2020, 29,800 new condominiums were launched, and approximately 36,500 new housing projects were launched, totaling about 66,300 units. In 2021, 21,500 new condominiums were launched, and approximately 25,100 new housing projects were launched, totaling about 46,600 units. This indicates that the number of new housing units launched in 2021 decreased by about 30%, with a total project value of approximately 191.2 billion baht, down 43% from 2020. The new launch figures reflect improved confidence among developers and a better sentiment in the housing market overall. However, developers have seen an increase in project development costs of about 15-20% due to rising material prices, transportation costs, land prices, and labor wages, which are expected to rise further.

Currently, the housing market is showing signs of recovery, but the price levels of housing that most consumers can afford remain low relative to their potential. For condominium units priced at no more than 85,000 baht per square meter, this price level is still considered affordable, with considerable supply and demand. For housing projects, developers are focusing on projects within approximately 2.3 kilometers from subway stations, particularly townhouse projects priced between 3-5 million baht.

Consumer confidence has improved as trading activities have returned to near normal. Although the policy interest rate has increased, financial institutions are still willing not to raise housing loan interest rates this year (but will gradually adjust in the following year) due to the liquidity in the financial system being relatively abundant. However, the government must be cautious about creating negative factors, such as the announcement of a windfall tax that may be imposed on the real estate sector.

Thai politics is entering a critical juncture that may lead to a general election sooner than the government's term, which is set to expire in May 2023. General elections typically stimulate economic activity due to government measures to support the people's livelihoods for campaigning and spending for political campaigns by all parties. Various real estate measures that benefit the public will be advantageous for consumers and developers, so there will likely be little change, and the enactment of laws or measures that may harm the government's popularity will be delayed.