Home • PRRES Inc. Journal • Read the Journal

Using Past Experiences to Develop an Early Warning System for Thailand’s Property Market

Author/s: Piriya Pholphirul

Date Published: 1/01/2006

Published in: Volume 12 - 2006 Issue 1 (pages 85 - 106)

Abstract

This paper has a two-fold purpose. First, it analyzes the causes, effects and consequences of speculative bubbles, and Thailand’s past real estate crises. The role of excessive credit extended by financial institutions is discussed as the main cause of real estate bubbles. Excessive credit is also believed to have been the major cause of passthrough financial imbalances and economic instability. Second, an early warning system for predicting a property-market crisis is created using two approaches: signal analysis and probability analysis. It shows that there are two leading indicators; the “ratio of post-finance to bank loans” and the “percentage increases in the price of construction materials”, that currently exceed the threshold level are signaling a future real estate crisis. However, the interest rate, which the models reveal as the most significant indicator of a crisis, is still far below the threshold level. Moreover, many financial institutions are currently offering competitive incentives for fixed-rate loans of, say, 1-3 years, to buyers of houses. For all these reasons, the probability of a real estate crisis in Thailand is quite low for the next 1-2 years, i.e., 2005-2007. However, neither model treats the potential impact of other incidents, such as restructuring of the financial system, proper bank monitoring and new urban planning, all of which could change the overall structure of the economy.

Download Full Article

Download the Full Article PDF

14445921.2006.11104200.pdf 14445921.2006.11104200.pdf (156kB)

Keywords

Early Warning System - Real Estate Bubbles - Real Estate Crisis

References

  • Baker, Dean. 2002. “The Run-Up in Home Prices: Is It Real or Is It Another Bubble?,” Center for Economic Policy Research.
  • Berg, A, E. Borensztein, G. M. Milesi-Ferretti, and C. Pattillo. 1999. Anticipating Balance of Payment Crises: The Role of Early Warning Systems, Occasional Paper, No.186, International Monetary Fund, Washington, D.C.
  • Collyns, Charles and Abdelhak Senhadji. 2002. “Lending Booms, Real Estate Bubbles, and the Asian Crisis.” IMF Working Paper No. WP/02/20.
  • Corsetti, Giancorlo, Paolo Pesenti, and Nouriel Roubini. 1998. “What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview.” Mimeo, 1-39.
  • Edison, Hali, Luangaram, Pongsak, and Marcus Miller. 2000. “Asset Bubbles, Leverage and Lifeboats: Elements of the East Asian Crisis.” Economic Journal, Vol. 110, 235-255.
  • Kaminsky, Graciela, and Carmen M. Reinhart. 1996. “The Twin Crisis: The Causes of Banking and Balance-of-Payment Problems.” International Finance Discussion Paper, No. 544 (March), Board of Governors of the Federal Reserve System, Washington, D.C.
  • Kaminsky, Graciela, Saul Lizondo, and Carmen M. Reinhart. 1997. “Leading Indicators of Currency Crises.” IMF Working Paper, WP/97/79.
  • Kim, Kyung-Hwan. 2000. “Korea: Could a Real Estate Price Bubble Have Caused the Economic Crisis.” In Koichi Mera and Bertrand Renaud, editors, Asia’s Financial Crisis and the Role of Real Estate. New York: M.E. Sharpe, Armonk.
  • Luangaram, Pongsak, and Markus Miller. 2004. “Asset Price Bubble and Financial Forbearance: The Role of Margin Requirement.” Working paper, University of Warwick. Mimeo.
  • Melpezzi, Stephen, and Susan M. Wachter. 2002. “The Role of Speculation in Real Estate Cycles.” Paper prepared for the July 2002 joint meeting of the American Real Estate and Urban Economics Association, Seoul, South Korea. Mimeo.
  • Renaud, Bertrand. 2000. “How Real Estate Contributed to the Thailand Financial Crisis.” In Koichi Mera and Bertrand Renaud, editors, Asia’s Financial Crisis and the Role of Real Estate. New York: M.E. Sharpe, Armonk.
  • Renaud, Bertrand, Ming Zhang, and Stefan Koeberle. 1998. “How the Real Estate Boom Undid Financial Institutions: What Can Be Done Now?” Proceedings of the National Economic and Social Development Board-World Bank Conference on Thailand’s Dynamic Recovery and Competitiveness, May 21-24, Bangkok.
  • Siegel, Jeremy, J. 2002. “What is an Asset Price Bubble? An Operational Definition.” Wharton School, University of Pennsylvania, mimeo.