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The Biggest Disaster in SE Asia Waiting to Happen: Thailand’s Massive Real Estate Bubble

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In 1997, the SE Asian Tigers all faced severe economic stresses, partially triggered by a primarily foreign capital-funded massive real estate bubble in Thailand. Today the EXACT same thing is happening as untempered foreign investment into Thailand’s real estate market has created not a “soaring” real estate market as economists always incorrectly explain them, but massive real estate market distortions better known as a bubble. And just as the world learned nothing from huge stock market crashes in 2008 as Central Banks have used the exact same tactics from back then to duplicate the re-inflation of massive US and European stock market bubbles today, it seems Asia is having a massive problem learning from the tragedy of 1997 as well. Back then, banking and economic shills explained the massive withdrawal of foreign capital that triggered the onset of the 1997 Asian financial crisis as “unforeseeable”, again a bunch of academic rubbish to anyone that understands how bankers engineer low-interest Central Bank policies to specifically transfer wealth from the millions of customers to the few that are part of the criminal banking class through their bait and switch tactics in capital markets.

 

 

The deliberate banking creation and existence of such a scenario in Thailand’s real estate markets today is painfully obvious to anyone that has ever studied the 1997 Asian financial crisis, yet it is the “elephant in the room” that no one is willingly to openly discuss in Asia at this time. Furthermore, it is obvious from the enormous $500 million+ windfalls kept by Wall Street CEOs of collapsed firms Merrill Lynch and Lehman Brothers in 2008, that those that create such massive asset price distortions (the banking class) are the ones that benefit most from its creation and are best informed via inside information to avoid the collapse. Consequently, when massively pumped-up and distorted asset prices collapse, it is of no consequence to the bankers that created them (other than in magnitude of profits) as they always front-run markets, exit them well before their own personal accounts would be destroyed, and short these markets on the way down based upon their inside information. Crises, in fact, are wonderful opportunities for the banking class to transfer wealth from the have-nots to themselves, as has continued to happen since 2008. In fact, international bankers will always view every asset collapse and consequent crisis as a massive opportunity to control a nation’s debt and kill the ongoing viability of local businesses at the expense of their own “crisis profiteering”. Thus given that we have even larger capital bubbles now than we did in 2008, bankers are salivating over the wealth transfer prospects now at hand. The IMF’s plan to control the debt of the SE Asian countries after the 1997 crisis was on display for all to see when they swooped in with their “bailouts”, which were nothing more than thinly veiled contracts with all kinds of restrictive conditions and impositions on the debt that hurt the working class of the nations they “bailed out” while it simultaneously opened up previously closed markets to rapacious multi-national corporations eager to gain a foothold in newly and rapidly growing emerging markets.

 

 

As I stated above, one of the key conditions, if not THE key condition, of the 1997 Asian financial crisis was the unchecked massive foreign capital inflows into the SE Asian Tigers in the 1990s that created easy liquidity responsible for the massive distortions of real estate market prices. In fact many Thai real estate developers borrowed capital in the form of unhedged USD-denominated loans during that time, lured by the cheap cost of borrowing US dollars. Today, I hear the same thing that was stated pre-1997 crisis all the time from financial advisers in Thailand: “there can be no crisis because there currently is so much easy liquidity!” That is not only a foolish, but an ignorant statement. Why do you think Thailand has so much liquidity in 2013? And why do you think Hong Kong and Chinese real estate markets are currently experiencing similar bubble properties today that manifest themselves in hyperinflated properties, such as the Shanghai housing market, a market that rose 12% higher (to 26,527 yuan/square meter) during the past month of October alone? Could the answer have anything to do with the fact that the Bank of England, the ECB, the Bank of Japan and the US Federal Reserve have all created trillions upon trillions upon trillions of dollars, euros, yen and pounds out of thin air, all available at dirt-cheap interest rates, and jammed it into the global financial system to keep the global Ponzi banking system alive?

 

What happens if that liquidity suddenly disappears again as it did in 1997?


What conditions could possibly create a rapid evaporation of the current easy liquidity?


What safeguards has the government taken to guard against a rapid exit of liquidity and are these safeguards adequate?

 

The above questions are all ones that need to be adequately studied and answered, and that’s what we will do within the scope of this article.

 

During 1990-1996, in the period that immediately preceded the SE Asian economic meltdown, capital inflows in Thailand increased more than seven fold from just 5 years prior to a stunning 10.3% of GDP. The vast majority, or 7.6% of the 10.3% of capital inflows, resulted from offshore borrowing by banks and private corporations, making the 1997 crisis primarily one instigated by a combination of greed for rapid profits and terribly lax banking regulations. The remaining capital inflows outside of offshore loans consisted of portfolio capital inflows (1.6% of GDP) and foreign direct investment (1.1% of GDP). In any event, since a sudden stoppage of foreign capital inflows into Thailand triggered the 1997 crisis, we must ask ourselves what could possibly trigger the same event in today’s financial environment? Since massive currency devaluation (otherwise dressed up in flowery terms by bankers as “quantitative easing”) undertaken by every Western Central Bank in the world has been responsible for huge capital inflows into Thailand at the current time, and most people that truly understand the dilemma of Western Central Banks (i.e. not academic-trained economists like Paul Krugman) understand that the West cannot turn off these broken faucets of monetary leakage for fear of collapsing their bond markets, most believe that Thailand is at no risk for a repeat of 1997. But is this assessment accurate?

 

To get the bottom of this question, we must first investigate what happened in and around 1990 that caused such a drastic shift in capital inflows as a percent of GDP in Thailand? To begin, the already stated relaxation of financial regulations in 1991 drastically altered the behavior of capital inflows to Thailand from 1987-1991 bank-sourced capital inflows that averaged 6.5% of all capital inflow to a whopping 50.4% of all capital inflows during the 5 years after deregulations. The reason offshore bank loans as a source of financing in Thailand soared after deregulation was simple economics. US prime rates and LIBOR rates were typically multiples lower than Thai bank interest rates. If you look at the chart below, you can see that this problem of cheap offshore financing has persisted in recent years, and as it did during the build-up to the 1997 crisis, low offshore interest rates are once again contributing to the same massive, bubbly capital inflows that caused the Thai real estate crash in 1997.

 

thaiinterestrates

 

As was the case in 1996, when the IMF predicted Thailand’s economy would recover in 1997, we are seeing the same pattern of errors by the IMF again in SE Asia (or perhaps just deliberate misdirection), as the IMF has just predicted Thailand’s growth to remain steady from 2012 at 7.8% in 2013 and just about the same at 7.7% in 2014 (Source: World Economic Outlook, 9 July 2013). Deloitte Research, Deloitte Services LP, is right on board with the IMF in predicting stability in economic growth despite huge capital bubbles in Thailand, stating in their 2013 outlook for Thailand: “Economic stability is not a concern, at least in the short term, and growth is likely to be self-sustaining,” though Deloitte was at least insightful enough to qualify their statement with “at least in the short-term”. (Source: Asia Pacific Economic Outlook, May 2013)

 

However, I believe that by H2 of 2014, if not earlier, the Thai Real Estate market will begin to show some real serious stresses from all the wasteful destructiveness of Western Central Banking monetary policy. During the first four months of 2013, total investment value in Thailand amounted to 510 billion baht, a whopping bubble-like increase of 80% yoy (Source: Thailand Board of Investment). By May, 2013, capital inflows into Thailand had reached USD$5.86 trillion (Bt176.37 trillion), triple the USD$1.85 trillion (Bt55.648 trillion) of inflows during the 2007-2008 US economic crisis (at the current exchange rates).

 

Since 2012 Q3, capital inflows have averaged US$4 billion (Bt120.32 billion), double the US$2 billion (Bt60.16 billion) average of the last five years. Thus, as I’ve discussed above, the enormous capital inflows into Thailand in recent years have caused bubble prices in the RE market and dwarf the capital inflows into Thailand that preceded the 1997 crisis. Thus, a sudden stoppage of inflows would have devastating effects on the Thai economy. So since Western (and Japanese) banking institutions are doing nothing to stop the capital inflows into Thailand with their near zero interest rate policies, lets see what the Thai government has done to prevent these enormous inflows from suddenly reversing direction as it did in 1997, causing the Thai baht to plunge to a record 50 baht per dollar (continued)...

 

To finish reading this white paper, please visit our website at https://www.smartknowledgeu.com and subscribe to our free newsletter. You will receive the link on how to download the full white paper “SmartKnowledgeU White Paper Series, 1 - The Biggest Disaster in SE Asia Waiting to Happen: Thailand’s Massive Real Estate Bubble” in your confirmation message after subscribing. This white paper may NOT be published, or re-printed on any other website or publication. Only the first paragraph of this article may be re-printed with a link back to this site.

 

 

About the author:  JS Kim is the Managing Director of SmartKnowledgeU, a fiercely independent investment consulting & research firm that investigates the excesses of Wall Street to protect the wealth of Main Street and seeks to uncover the best ways to invest in gold and silver.

 

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Tue, 11/19/2013 - 12:00 | 4169687 wharfdaddy
wharfdaddy's picture

I live in Bangkok and have for 13 years.

I wouldn't buy a green Banana in this Country.

Tue, 11/19/2013 - 11:49 | 4169652 Life of Illusion
Life of Illusion's picture

 

 

Thais are concerned with dollar/yen carry trade reversing and setting them up for a liquidity problem.

Recently looking to tap dollar bond sales says they are in need of liquidity and if baht devalues they are left with load of debt to pay down.  Who will own (collect) the bonds, china or japan/usa asia pivot?

TIT

http://www.ft.com/intl/cms/s/0/73de4bfc-3feb-11e3-8882-00144feabdc0.html#axzz2l6rPtASh

Tue, 11/19/2013 - 11:37 | 4169593 ricky663
ricky663's picture

I can see the point of the article, but I don't think the author has "explained it well."

I live in Thailand, and have a couple of points:

The Thai banking system is not the same now as the US system was leading up to the financial MBS meltdown. First of all, they will only loan up to 50% for the home value (or construction costs), so 1/2 of the leverage is removed. Also, they will actually verify your income, check the real property clearly, etc. If you do a construction loan, they are very strict on the progress payments.

"Foreign Capital Inflows?" The Thai banks are all over this, and do accept wires to flow in, but won't allow money to exit as easily. So if you send money in, you better be prepared to deal with paperwork for funds to exit. Makes it a bit more complicated to "flip" real estate.

There may very well be foreigner's driving up prices by paying cash, if they don't perform due diligence. It is not hard to find comps for real estate here.... all of the large developers hand out "product flyers" in the malls and elsewhere, which give you exact pricing for new homes/condos/townhomes. This info is available online as well. In other words, if you are a sucker, you may overpay.

Thailand has been hit by inflation, just like everywhere else. This is a result of seemingly uncontrolled and endless printing by all of the central banks. This is destroying some sovereign economies (look at Egypt, and India, for example).  I think this needs to be factored in to the prices of real estate, etc.

 

 

Tue, 11/19/2013 - 09:53 | 4169164 Stuck on Zero
Stuck on Zero's picture

George Soros.  Hello.  Are you reading this?

 

Tue, 11/19/2013 - 09:45 | 4169122 CheapBastard
CheapBastard's picture

It's a global Bubble due to EZMoney for the Few. My old house is still up 360% in only 8 years....not worth it but when you have that much EZ Cash being pumped into some economies Bubbles appear. How it will end?

RE runs in cycles like everything else. For RE my old prof tells me it runs in 10-12 year cycle...so we are getting close to the 10th year depending on when you calculate the Bubble started.

Tue, 11/19/2013 - 09:08 | 4169026 laosuwan
laosuwan's picture

Thailand has a lot of problems and probably is a failed state in the making but to say the RE bubble here is the biggest problem in SE Asia is an exaggeration. Bigger than dessertification in China, bigger than water shortage in India, bigger than Islamic invasion of Myanmar and Thailand, bigger than off balance sheet financing of govt spending, bigger than massive debt of consumers and goverhment? I think not. Yes Thai real estate prices are insane but most of the speculative markets see houses and condos bought for cash not financed. Speculators can simply wait it out. Will the market crash? Yes. Will it be anything compared to the SET crashing or when the shinawatra criminal syndicate sends the red shirt mobs marching on Bangkok again after the passing of HM occurs? No. Real estate will crash but it wont be the main event.

Tue, 11/19/2013 - 09:29 | 4169086 carlin401
carlin401's picture

Well it is a problem, and the bubble will burst.

It's a very well understood problem, anywhere, but say Thailand, where wages are $6/day. That's about $200/month, or $2500/year. Say a farm is $30,000, that is very expensive, using normal rule of 4X, that means our purchaser can only get a $5,000 loan, an auto.

Who can get a loan for $30K in Thailand? Teachers, cops, folks with a gubmint job.

Well that's ok too, so everyone lives and rents, a nice place is about $15/month to rent ( local price in USD ), most thais their single biggest expense is booze.

Most family farms are held, but with prices folks will sell, and that family will never again be free. It is still possible in thailand to 'live off the land', 100% grow rice, chickens, pigs, and vegies, cut down local tree's for firewood, local area's contain material to build homes. Virtually everything for locals except petro for their scooter is free. Hell even the hooch is made from local rice, and is free, if you consider that most hooch is made from left over 'sticky-rice'.

I guess the problem is like Faber say's every body is printing money, including the chinese, and that money flows to thailand, and it will destroy these peoples native way of life.

Good news is you just stay far from the corridors of chinese investment, the chinese prefer to be near the super highways they're building all over SE-asia, stay far from bridges and railroads and super-highways, and you just might think your living in the 1600's.

There still are many road-less areas in myanmar, laos, and thailand, that are far from anything a chinese will ever see, one last thing about chinese, they're just like japs when they travel, they all go to the same place.

Tue, 11/19/2013 - 10:59 | 4169445 Amagnonx
Amagnonx's picture

'Well that's ok too, so everyone lives and rents, a nice place is about $15/month to rent ( local price in USD )'

 

I dont know what rolled up newspaper you live in at B450 a month, but even pretty much a dump small, single room will run you about B2,000 a month.  Even in the absolute boondocks you wont be finding B450 a month for anything we would consider livable.

 

In a town or city, a student usually pays B2,500 - B3,500 ($100USD)for a single room - families maybe B5,000-B10,000 ($200-$400USD)for a small townhouse, or small house - and B15,000+ for a standard house or quality condo.

Tue, 11/19/2013 - 09:23 | 4169071 Popo
Popo's picture

"Will it be anything compared to the SET crashing or when the shinawatra criminal syndicate sends the red shirt mobs marching on Bangkok again after the passing of HM occurs?"

Well said.

Tue, 11/19/2013 - 09:02 | 4169014 mijev
mijev's picture

Malaysia has a minimum investment for foreigners buying real estate. Next year it will double to around US$330K which basically means foreigners can only buy places that the average malaysian couldn't afford. Compared with thailand, the prices are generally higher but the build quality is probably higher as well. I'll go take a look at Thailand in january and compare. 

Tue, 11/19/2013 - 09:09 | 4169008 carlin401
carlin401's picture

Living in China and traveling all over SE asia, monthly I'll toss in my observation.

Like always the OP post title here is 100% crap, sure in BKK stuff is way out expensive, but up country, you can still get a acre of good location land for $15k USD, and build a 3 story home for $30k, ... so what the fuck are we talking about? Expensive?

Myanmar and Laos are fucked by China money coming down, word is that the chinese have already bought Udon-Thani, and with the new bridge at chiang-khong, the thais are bitching like hell about the rise, in prices but its all chinese money.

Here's the fucking deal, as a foreigner, I CAN-NOT buy land in SE-asia if I wanted too, but a chinese person can, and that is the fucking problem. In china, here its millions of yuan for a fucking 'flat' what we in the west would call a 'compartment' (apartments are big).

Already north Laos&Myanmar have hyper-inflation from the influx of chinese 'investment', and now the north of thai, Laos is so fucked just in the last year, I have quit going, beer is now more expensive than here in china.

The problem is easy chinese money, but the real fucking problem is the se asean gubmints letting these chinese buy the poor's land with FIAT, and so tomorrow much of se-asia will be renters.

Who would have guessed that chinese communists would have enslaved all those outside of china with capitalist fiat? Who would have guessed that SE asia governments would have participated in the swindle?

Tue, 11/19/2013 - 10:07 | 4169226 czardas
czardas's picture

I woud certainly have predicted it knowing the history of Asian government.   It's not like these places were ever big on individual or property rights.  In India, it was the Brahmans, in China, the ruling elite and now the Communist Party, same in Vietnam and Loas.  As noted, the real value of the Thai bubble is tiny.  So color me shocked that these nations are not acting in the best interests of their citizens.  

Or maybe they are.  Perhaps they see Chinese influence as a path to the next technological generation.  Perhaps they see the writing on the wall and realize the muscle-intensive, crowded societies of the past are finished.  Perhaps they think that pain now will be for the "greater good" - much as the Chinese one-child policy.  You certainly have a better perspective than we do.

Tue, 11/19/2013 - 08:36 | 4168958 Cookie
Cookie's picture

Who listens to the IMF? The country's own forecast for 2013 growth is 3%

http://www.bbc.co.uk/news/business-24982609

Tue, 11/19/2013 - 08:43 | 4168976 Popo
Popo's picture

Actually, the country's initial forecast was 12% just 1 year ago... Then 8%.... Then 6% ... Then 5%.... Etc.

Their finance minister is like Baghdad Bob.

Tue, 11/19/2013 - 08:40 | 4168948 Oldrepublic
Tue, 11/19/2013 - 08:41 | 4168924 Popo
Popo's picture

This may or may not be a good article. But since you have to subscribe to actually read the entire thing (including the part where he actually makes his case), I have no idea.

Tue, 11/19/2013 - 08:04 | 4168913 Machination
Machination's picture

The writer of this article has diarreah of the fingers.  I've lived in Asia for 20 years and seen many a bubble and lived in Thailand for 5 years.  Thailand is still undervalued in the region.  Just compare prices to Singapore, Myanmar, Vietnam.  All are more expensive TODAY than Thailand.  Myanmar pricing near the airport in Yangoon is more expensive than financial district Bangkok.  WTF are these guys talking about who wrote this article?

And oh yeah, my wife owns several apartments and they rent for positive yeild 7%.  Where can you get that in Asia?  Not China.  Not in a LOT of places.  7% yield on rental is not a bubble on RE prices.

Now let's talk about oversupply.  Yes there could be an oversupply coming onto the market in the near future.  But not for all of the land of Thailand, but for apartments in Bangkok.  There is oversupply here but nothing compared to what I see in China.  The land here is fertile, i.e.: throw any seed down and it is producing food in a month.  Any seed, take your pick.  

Housing here (downtown or suburban Bangkok) is a FRACTION of most of China and Asia pricing.  Go outside of Bangkok greater metro and the pricing is well pretty cheap considering.  Don't forget the freehold / leasehold legal issues in Thailand the foreigners can't just buy the land without some proxy out there.  

 

Tue, 11/19/2013 - 09:14 | 4169053 carlin401
carlin401's picture

Don't forget the freehold / leasehold legal issues in Thailand the foreigners can't just buy the land without some proxy out there.

***

Correction 'white men' can't own land ( hold title legally in their name ) in Thailand,

Tue, 11/19/2013 - 08:28 | 4168947 Popo
Popo's picture

Your measure of a bubble is to compare it with bigger bubbles? LOL.

You measure a bubble by measuring household debt (horrible in Thailand), price to salary ratios (horrible in Thailand), NPL's (not good, although the BoT is doing their best to cover this up) and the percent of investment dollars flowing into an investment class vs the historic mean (oh yeah, it's a bubble).

For someone who lives in Bangkok, it's amazing that you don't seem to notice that there are giant billboards for luxury condos every 10 meters. You obviously have zero idea what a bubble looks like. You're like one of those realtors who says "There's no bubble, because there is demand".

And your summation that Thai real estate is a "good deal", misses the mark. It may be a good deal to you as a foreigner, but that is hardly the point. To make the argument that Thai real estate is not a bubble, you must also make the case that Thai salaries are preparing to leap almost 300%. And if you think Thailand's relatively small export economy can handle a spike in salaries (while ASEAN is about to put unbearable downward pressure on Thai salaries) then you're in for a rude shock.

Add to that the disastrous quality issues, collapsing western demand, coming baht devaluation, political uncertainty, etc... And there's no possible way to make a strong case for Thai real estate.

And what was that about planting seeds? wtf?

Tue, 11/19/2013 - 10:46 | 4169379 Machination
Machination's picture

POPO what bubble do you live in?  What is the price per square meter of land where you live brother?  Do you dare to actually compare and post it? Do you even know what the price is?  The world is flat and might as well share the price.  What is it?

Wed, 11/20/2013 - 03:35 | 4172649 Popo
Popo's picture

I live in Thailand

Tue, 11/19/2013 - 10:35 | 4169351 Machination
Machination's picture

"Planting seeds" was a comment that you should know if you have any understanding of Thailand.  You buy a piece of land and it will feed your family with its fruits.  Not a bad ROI.

Tue, 11/19/2013 - 09:06 | 4169022 carlin401
carlin401's picture

Well what I'm seeing is massive chinese men semi-retired say post 40+ and without a wife, and guess what? They go down south to Thailand, get a gal pregnant, and buy her a house, and now they have a family, with no limit to the number of children,

Go on the internet and 'chat' with thai women, and ask if she is a single-mother? Then ask where is the father? 90% of the time she'll tell you 'back in china',

A lot of the women on the internet, they'll not lower themselves to work the 'bar', but they have no problem hustling money on the internet from lonely fools ( chinese and thai), especially since thai women don't speak chinese, often the language intermediary is 'english', so its easy to hook up and learn, talk about anything including real-estate prices.

***

Anyways the problem here is foreign money will drive up real estate so high that local poor will lose their farms. The gubmint long had a ban on foreign ownership, but somehow the chinese are exempt.

Tue, 11/19/2013 - 08:28 | 4168946 overmedicatedun...
overmedicatedundersexed's picture

machination, living a life many post about here on ZH, good on ya mate.

I visited bangkok in 1970-71, liked the people and the food, a bit humid, the beer at the movies was a nice bonus.

are you american expat? Living there full time is a true adventure no doubt.

Tue, 11/19/2013 - 07:51 | 4168898 AUD
AUD's picture

There may have been foreign capital flooding into Thailand in the '90's, but Thai real estate is denominated in Baht, the obligation of the Bank of Thailand. A real estate bubble is thus the product of the inflationist policies of the Thai government.

The Asian crisis was the result of the massive buildup, then liquidation of bad debt. The Bank of Thailand was stuck holding the bag & the Baht fell heavily when 'capital' began to exit the country.

But yes, you're right it is happening all over again & the result may be the same.

Do some investigation into what happened in the Solomon Islands, if you want to see what can happen when the S really HTF.

Tue, 11/19/2013 - 11:45 | 4169630 0b1knob
0b1knob's picture

Thai real estate is Baht shit crazy?

Tue, 11/19/2013 - 07:36 | 4168887 Max Damage
Max Damage's picture

Same in London. Property prices there are in a world of their own.

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