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Investing in property will pay off despite soaring inflation |
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source: The Nation June 30, 2008
As many are now beginning to realise, the state of the global economy is
something to worry about.
The US dollar is weakening and the rising prosperity in China and India is
pushing up inflation around the world with prices of energy, food and
commodities hitting the roof.
"What is to be done?" one might ask. And the answer may even make real estate
more interesting to those who have the purchasing power to go property shopping.
The rise in prices of energy and commodities may have a huge impact on a country
such as Thailand, where logistics capability is still underdeveloped and
dependence on import of energy and commodities, such as steel, is high.
The rising inflation has put pressure on the Bank of Thailand to raise interest
rates. Many commercial banks have followed suit. Bankers are also getting
cautious about financing projects and mortgage lending.
How do these macroeconomic factors affect the Thai property sector? On the
supply side, higher prices of raw materials and energy have sent the costs of
building projects accelerating in fifth-gear mode this year.
The raw-material cost index, tracked by the Commerce Ministry, has recorded a
more than 15-per-cent rise from the beginning of this year to last month.
With land getting scarce, the cost of new residential units is more likely to
rise than fall. With bankers getting more cautious about financing projects,
developers have learnt to watch the market closely. Since the credit crisis
broke, the Thai housing market has been adjusting itself to maintain
equilibrium. As a result, the market will not crash and home rates will not
drop.
On the demand side, the heightened inflation has decreased the real purchasing
power of the population. Higher cost of living has reduced the ability to save,
reflected in the lower capacity to acquire permanent asset such as homes or
cars. The rise in interest rates and tightening of bankers' control over lending
has made it even harder to save. However, a house is a basic need. Living space
is not something that one can afford to do without.
So what should home-buyers do? My advice is not to panic and figure out your
real purchasing power.
The high inflation and low interest make savings negative in real terms, so
locking up money in savings accounts may not be a good idea. The cost of a house
tends to rise faster than inflation. With the era of low interest rates likely
drawing to a close, buying a house is a natural hedge against inflation. Buying
a property is such a scenario will help build up equity as long as one can
afford to pay.
So, start saving today to increase your real purchasing power. You can track
your expenses and debt obligations in this high-cost situation for at least six
months to see how much you can save. This should give you a sense of how much
you can afford to invest in a long-term asset.
If you figure out how much you can save, this is a good time to build your
equity by acquiring property you have been dreaming of before it gets out of
reach.
By DR THEERATHON THARACHAI
ASSISTANT DIRECTOR RESEARCH & BUSINESS DEVELOPMENT DIVISION OF PROPERTY PERFECT
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Contractors leave projects as firms dither on prices |
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Many contractors abandoned projects in the face of high construction costs in
the first half of this year, Thai Contractors Association Under HM the King's
Patronage's director Danuch Yontararak said.
During a seminar, "How constructors and property developers can do business when
raw-material costs are rising", organised by Krungthep Turakij last week, Danuch
said the association did not have the exact number of projects that were left
incomplete by contractors.
The association has been trying to convince developers to factor in the rise in
construction costs into existing contracts with builders. Because most contracts
were signed last year, the rise in costs this year has made earlier estimates
unviable. Therefore, contractors are seeking to revise the contracts. If
developers do not revise contracts, contractors may opt out of projects to cut
losses, Danuch said.
The government has allowed for revision of prices by 4 per cent to 8 per cent in
view of the increased construction costs. However, most private companies have
stuck to earlier contracts, forcing contractors to leave projects incomplete in
the first half, Danuch said.
Contractors are also trying to cut expenses by hunting for alternative raw
materials and tweaking construction processes, he said.
Ascon Construction managing director Pattanapong Tanumathaya said his company
has been negotiating price revisions with developers it has signed contracts
with.
"Some understood the business situation and agreed to revise the existing
contract. But some didn't understand and didn't want to change the contract. As
a result, we have had to complete projects at a loss," he said.
Ascon cannot abandon projects because it is listed on the stock exchange, he
said. But most small- and medium-sized contractors with low cash flow have no
such compunction, he said.
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