East Asian Economy Analysis: Thailand’s Real Estate Bubble

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Table of Contents

Introduction
A Review of Bubble Economies
Causes of Thailand’s Real Estate Bubble
The Aftermath of Thailand’s Real Estate Bubble Burst
Averting Economic Bubbles in the Future: A Thai Experience
Conclusion
Works Cited

Introduction

Economists believe that the rise and fall in the prices of assets have a strong impact on the real economies of most countries. The change in prices reflects the nature of economic activities taking place in the nation. The associated market dynamics affect the financial position of households and firms. They also inform the formulation of investment and savings decisions in these economies. The duration and magnitude of these changes affect business entities by increasing their vulnerability to shocks (Heath, 2005).

In 1993, the World Bank ranked eight high performing economies in Asia. The organization divided these entities into three major groups. The divisions were based on specific uninterrupted periods of positive economic growth between 1960 and 1993. Thailand was one of the countries ranked in this report. However, the economic development of Thailand and other emerging economies in Asia suffered a major setback beginning in 1997.

The financial meltdowns had disastrous effects on both the local and the regional economies. Thailand’s real estate bubble was a major aspect of the growth recorded earlier in this country. However, when the economy collapsed, the bubble burst under the pressure. The formation and collapse of this bubble, together with associated economic impacts, will be analyzed in this paper.

A Review of Bubble Economies

Understanding the concept of economic bubbles is essential in the analysis of Thailand’s real estate boom. A bubble is used to illustrate economic behavior in this case. To this end, economic patterns are compared to a soap bubble. The element is usually unstable since it flows for a few seconds and then bursts (Nabarro and Key, 2005).

According to Stephansen and Koster (2005), the ‘bubble economy’ phenomenon occurs when a country experiences a sharp increase in prices in a number of industries. Economists use bubbles to describe companies or sectors of the economy that expand rapidly. The particles rupture when these rising and volatile environments undergo a sudden decline (Stephansen and Koster, 2005).

Real estate bubbles occur when the market experiences unusually high volumes in relation to the sale and purchase of houses (Wong, 1998). In addition to the increased sales volumes, the prices of the commodities rise very fast. In the end, the rising markets come to an abrupt end. The buyers eventually disappear, leading to a precipitous drop in the prices of units.

A similar cycle was evidenced in Thailand in the mid-1990s. The expansion in the country’s real estate sector induced an economic crisis, which started in 1997. The financial systems of the country, as well as the overall economy, suffered severe setbacks when the real estate industry crumbled.

According to Heath (2005), booms and busts in the property sector lead to major banking problems. For example, downward corrections result in profit reductions and deteriorations in the quality of assets (Stephansen and Koster, 2005). Financial institutions and the larger banking industry are negatively affected by these developments.

Stephansen and Koster (2005) highlight the effects of property booms and busts on macroeconomic activities. Upswings usually improve these activities. However, downswings exert pressure on the banking sector. They do this by increasing the bad debt associated with loans borrowed against real estate. Corporate balance sheets on which real estate borrowers rely are also affected. As a result, these market cycles generate a lot of interest among financial regulators and other monetary authorities. A balanced analysis of Thailand’s real estate bubble could have averted, prevented, or minimized its effects on the country’s economy.

Causes of Thailand’s Real Estate Bubble

According to the Bank for International Settlements [BIS] (2006), Thailand was a model country undergoing sustainable economic development in the early 1990s. The economy of the country was a preferred option for international development agencies. For a period of more than a decade, Thailand underwent an unprecedented economic boom. Inflation in the country was moderate, making the economy stand out as a healthy reserve for foreign exchange (Wong, 1998).

A dramatic rise in export growth rates, coupled with very high levels of capital inflow, were the major drivers of the boom (Trairatvorakul, 2011). Direct external investments and capital influx also affected development. They fuelled immense growth in the domestic market. The massive capital inflows arose mostly from external bank loans. They were also linked to speculative portfolio investments (Trairatvorakul, 2011).

Because of these events, the unheard of business optimism became apparent in Thailand. There was extensive property market speculation, as well as an increased rate of construction in Bangkok (Brimble, 2002). The boom in the real estate market did not center on housing markets. Agricultural land, office buildings, resorts, mini-factories, as well as golf courses sold very quickly and at very high prices. Eventually, the market started to overheat. Speculators started to push ordinary homebuyers from the market (Carl-Johan, Balino, Enoch, Gulde, Quintyn, and Teo, 1999).

According to Brimble (2002), Thailand experienced extensive economic liberalization from 1990. Investors could easily access funding at low costs. The funds were channeled into an unproductive real estate sector and other less competitive businesses. The country’s current account recorded high levels of the deficit. Speculators expected the Bank of Thailand to devalue the currency. As a result, they attacked the Thai Baht. The action made it hard for Thailand’s central bank to protect the currency, leading to a tremendous loss of the international reserves held by the country (Brimble, 2002).

The majority of real estate assets and commercial office spaces were economically unviable. The financing companies incurred huge losses due to this dip in market prices (Sinha, 2011). In retrospect, the imprudent behavior of the investors can be blamed for the fall of Thailand’s real estate market. However, Collyns and Senhadji (2002) also attributed this fall to a lack of liquidity in the financial system. The burst can also be associated with prevailing high construction and mortgage rates in the country. In addition, an over-supply of real estate products led to the failure of the system.

Before Thailand’s real estate bubble ended, the average annual growth rate was consistently high. The table below illustrates the country’s performance in relation to other high performing Asian economies in the period preceding the real estate bubble burst.

Table 1: Thailand’s Economic Growth.

	1960-1979 (percent per annum)	1979-1995 (Percent per annum)	1996 (Percent per annum)	1997 (percent per annum)
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Thailand	7.6	7.8	5.5	-0.4
Indonesia	5.7	6.2	8.0	4.7
Malaysia	6.8	6.8	8.6	8.0
Japan	7.5	3.2	3.6	0.9
South Korea	12.3	7.8	7.1	5.5
Taiwan	9.6	6.7	5.7	6.7
Singapore	8.5	7.6	6.9	7.8
Hong Kong	10.2	6.5	4.7	5.5

The Aftermath of Thailand’s Real Estate Bubble Burst

The development had immediate and future consequences on Thailand’s economy. Immediate effects included the losses suffered by the industries operating in the property market. The land and housing developers incurred huge losses in terms of reduced sales and increased operational costs. The financial institutions, on the other hand, suffered from slowed mortgage lending. They were also affected by foreclosures and an increase in bad debt due to defaulters.

The fall of the real estate industry also affected the poor population in Thailand. Because of the boom in the sector, a substantial portion of the country’s rural population migrated to Bangkok and other urban centers in search of employment. The services and manufacturing sector had grown at a very fast rate compared to agriculture. Due to this skewed growth, many jobs were concentrated in urban areas, especially in Bangkok.

Following the 1997 burst, the currency depreciated by 60%. The depreciation led to increased levels of inflation in the country (Nabarro and Key, 2005). Consequently, the wages of unskilled workers reduced substantially. Some of them lost their jobs, and food prices skyrocketed. Many people were forced to return to rural areas. However, mechanization in the agricultural sector and drought dimmed the prospects of many people going back to the villages.

Before the property market boom, the majority of the labor force in Thailand was sourced from rural areas. The following graph shows the growth of Thailand’s real wage between 1982 and 1994:

*Figure 1: Thailand’s Real Wage Growth.*

The collapse of Thailand’s property market also affected the rich. The affluent members of society were negatively affected by the increased cost of goods and financial services. They also had to deal with an increase in the price of the domestic currency. The servicing of foreign debt negatively affected the investments made by members of the middle class.

Thailand’s bubble can be summed up using real estate cycles and banks, as evidenced by Nabarro and Key (2005).

Table 2: Real Estate Cycles and Banks.

The Economy	Real Estate	Banking	Added Factors
Early upswing: low-interest rates, rising demand.	High vacancy. Unchanged rents from the previous cycle. Reduced vacancy rents. Reduction in yields. Building upswing. Reduction in supplies. The rise in rents. Decreased yields. Increased developments.	Low real estate debt.	Relaxed financial regulatory systems. Non-existent regulatory and supervision frameworks. Introduction of non-bank financial institutions.
Increased upswing. Growth in demand. Increased inflation.	Rate of vacancies increases. Earnings from rents stabilize. Increased yields.	A rise in the value of financial assets. A rise in loan volumes.
Economic growth. Demand declines.	A rise in the number of new buildings. Earnings from rent reduce. Unregulated sales by disillusioned owners and banks.	A decline in the worth of assets and security. Credit squeeze. Foreclosures and work-outs.

Averting Economic Bubbles in the Future: A Thai Experience

Government policies and intervention in macroeconomics is a key indicator of economic bubbles (BIS, 2006). The policies should be structured to support functioning and stable real estate markets. Continuous analysis and monitoring of markets help to identify signs of market fluctuations (Sinha, 2011). They help the government to come up with timely and appropriate responses to economic bubbles.

An evaluation of the markets and an analysis of subsequent factors influencing demand and supply can help detect economic changes. The development of effective information systems by economists can help in detecting and dealing with volatile and uncertain market environments. It is clear that Thailand’s real estate bubble resulted from misinformed investment decisions. The government lacked the foresight essential in macroeconomics.

Conclusion

It was possible to prevent and manage the real estate boom in Thailand. The economic strategies adopted in Thailand focused on rapid development without a clear framework or control measures. Over-confidence on the part of investors was another factor behind the crisis. The sustained economic boom in the country led to the formulation of rigid macroeconomic policies by the government. There were new developments in the local and international economies. However, the government insisted on previous economic policies.

Economic policies and strategies should be adjusted to meet present economic environments. In addition, rapid economic development should not be the priority of governments. The expansion and collapse of Thailand’s real estate market were disastrous. Macroeconomic strategies and policies call for the participation of all stakeholders in the economy.

Works Cited

Bank for International Settlements 2006, Monetary Policy in Asia: Approaches and Implementation. Web.

Brimble, Peter 2002, Foreign Direct Investment: Performance and Attraction, the Case of Thailand. Web.

Carl-Johan, Lindgren, Tomas Balino, Charles Enoch, Anne-Marie Gulde, Marc Quintyn, and Leslie Teo 1999, Financial Sector Crisis and Restructuring Lessons from Asia. Web.

Collyns, Charles, and Abdelhak Senhadji 2002, Lending Booms, Real Estate Bubbles, and the Asian Crisis. Web.

Heath, Robert 2005, Real Estate Prices as Financial Soundness Indicator. Web.

Liam, Ryan 2000, The Asian “Economic Miracle” Unmasked: The Political Economy of the Reality. Web.

Nabarro, Rupert, and Tony Key 2005, Performance Measurement and Real Estate Lending Risk. Web.

Sinha, Anand 2011, Reflections on Regulatory Challenges, and Dilemmas. Web.

Stephansen, Kathleen, and Maxine Koster 2005, Housing Valuations: No Bubble Apparent. Web.

Trairatvorakul, Prasarn 2011, Growth, Sustainability and Inclusiveness – Thailand’s Key Success Factors. Web.

Wong, Kar-yiu 1998, Housing Market Bubbles and Currency Crisis: The Case of Thailand. Web.

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