Household debt surge impacts property and auto sectors

The accumulated domestic debt and non-performing loans (NPLs), coupled with stagnant buying power, have continued to suppress domestic consumption since the previous year, with the property and automotive sectors suffering the most significant blow. This is reflected in the high rate of home loan refusals and car repossessions.

The numerous interest rate increases last year exacerbated the financing issues, with some economists arguing that the prolonged period of low-interest rates before the increases has led to the current overwhelming debt level. The National Economic and Social Development Council (NESDC) data reveals that the household debt-to-GDP ratio, nearing 90.9% as of the third quarter of 2023, is considered high and can inhibit individual spending.

While the recent household debt level is not the highest in the past five years, the concern lies with the quality of household debt. Those intending to purchase a house may find it challenging to secure a loan due to financial institutions’ cautious approach in light of the fragile purchasing power. Officials also view car repossessions as a critical figure to monitor this year.

According to Alongkot Boonmasuk, secretary-general of the Housing Finance Association, the mortgage rejection rate currently exceeds 50%. This surge is attributed to low-income earners seeking to purchase residential units priced below 3 million baht (US$84,000).

Developers attribute the higher rejection rate to various factors, including the economic slowdown, multiple interest rate hikes, high household debt levels, inadequate financial planning, and developers’ eagerness to boost sales.

Inevitably, these factors have resulted in developers falling short of their revenue targets. Generally, prospective homebuyers book a unit, making a down payment worth 5 to 15% of the unit price, payable monthly over 6 to 12 months for a low-rise house or up to three years for a condo unit, depending on the project and developer.

However, during the down payment period, if the economy takes a downturn, some mortgage applications are rejected when the property transfer is due. The rejection reasons could be linked to the homebuyers’ details or the financial institutions’ policies. For instance, a poor economy could lead to lower earnings for some buyers, while banks may adopt a more cautious lending approach.

Household debt

Last year’s five interest rate hikes also contributed to the higher rejection rate by reducing consumer purchasing power. Banks responded by imposing stricter lending rules for both existing and new buyers. For those who had completed their down payment, the high-interest rates at the time of the property transfer, compared to when they booked the unit, reduced their borrowing capacity.

With higher interest rates, potential homebuyers often have to make a higher down payment or seek a co-borrower to get approved for a mortgage. However, not all potential homebuyers succeed at these options, leading to increased mortgage rejection rates. Some misunderstand the developer’s screening process on the booking date, thinking it guarantees mortgage approval.

In the third quarter of 2023, the quality of household debt deteriorated for all types of credit, with NPLs amounting to 152 billion baht (US$4.3 billion), or 2.79% of total loans, up from 2.71% in the previous quarter. At the end of 2022, NPLs totalled 140 billion baht (US$4 billion), making up 2.62% of total loans.

Despite ranking fourth on the list of highest household NPLs in the third quarter of 2023, special mention (SM) auto loans were remarkably high for the quarter at 14.6%, followed by personal loans at 6.66%. SM loans refer to debts unpaid for 30 to 90 days, needing special attention, reported Bangkok Post.

In 2023, up to 250,000 cars were repossessed, compared to the average of 180,000 seizures a year. According to the Federation of Thai Industries, sales of pickups remained sluggish in January, dropping over 43% year-on-year as banks remained cautious in determining loan requests. The downturn in the domestic automotive industry was a significant factor affecting January’s Manufacturing Production Index, which decreased by 2.94% year-on-year to 99.2 points.