How Will Real Estate Market Perform When Credit Supply Is Tightened?

2:29:47 PM | 31/12/2019

Although the State Bank of Vietnam (SBV) advocated tightening credit for real estate because of high risks, in 2019, property credit still led the growth and grew 1.5 times faster than the economic growth pace.

Risk factor increased

The SBV has continued to tighten property loans while introducing a roadmap to gradually reduce the maximum rate of short-term funds used for medium and long-term loans. According to the recently issued Circular 22, the central bank has set safety limits and ratios in operations of banks and foreign bank branches.

Specifically, the maximum ratio of short-term funds used for medium and long-term loans will be 40% from January 1, 2020, to September 30, 2020, and will be reduced to 30% from October 2020.

In addition, the SBV increased the risk ratio in real estate business from 150% to 200%.

Accounts receivable that are guaranteed entirely by houses (including future houses), land-use rights, constructions built on the borrower’s land-use rights, and meet one of the following conditions will have a risk factor of 50%.

Other receivables, for example individuals have a total loan of VND4 billion onwards in all credit contracts (after deducting receivables from such customers and imposing a 50% risk factor) will be subject to a 120% risk factor, effective from January 1, 2020 through December 31, 2020 and then to 150% from January 1, 2021.

Also according to the above circular, the maximum ratio of outstanding loans to total deposits is 85% for banks and foreign bank branches.

So, after three years, the credit tightening roadmap for real estate has been officially closed. This rate was only 30% in previous years, but in 2014, the SBV suddenly expanded it to 60% and gradually retightened it back to the old rate. The plan is expected to keep going in the next three years.

In the SBV’s report submitted to the lawmaking National Assembly (NA), the credit for risk fields like real estate and consumption increased from the end of last year. Specifically, as of August, real estate credit grew by 14.58% from the end of 2018, accounting for 19.14% of total outstanding loans in the economy.

Banks attributed the 14.58% credit growth for real estate and a higher share of the total outstanding loans in the economy to the SBV’s inclusion of loans for self-use purposes (individual customers borrowing money to buy or repair home). Previously, home-repair loans and home purchase loans borrowed by individual customers were categorized consumer credit (consumer loan) by commercial banks. This explains why the real estate loan growth is high and accounts for a larger share of total outstanding loans.

Meanwhile, according to calculations, real estate inventories of 67 listed companies reached nearly VND170,319 billion as of June 30, 2019, an increase of 1.7% versus the start of the year. In the real estate market, planned inventories and distributed inventories are normal. However, unmarketable inventories are related to liquidity. Recently, real estate market has low liquidity as a series of projects are finding it hard to sell their products. Especially condotel projects in the Central Coast or condominiums in big cities have very few buyers. Many businesses reportedly have due debts to banks and they cannot find enough cash to repay their loans. If they fail to settle their debts soon enough, their debts will become overdue and nonperforming.

Many banks have stepped up buying bonds issued by real estate companies to “help” them pay back their debts in time, thus reducing bad debts. Otherwise, their bad debt ratio maybe even higher.

More intense competition

According to real estate experts, credit tightening will disrupt the real estate market in the coming years.

Mr. Nguyen Van Dinh, Vice Chairman of Vietnam Real Estate Brokers Association, said, the credit tightening by the SBV continues to be a strong “blow” to the property market, although there was already an announced roadmap. The move by the SBV and commercial banks all show that the market requirements are changing. Competition will be fiercer in the future. Without a well-established brand, without a good strategy and without a new cash flow, real estate companies will have difficulty surviving if they cannot change their habits and ways of working.

Currently, the fund mobilized by customers largely comes from banks. The domestic capital market still lacks other sources such as investment funds (including venture capital funds), real estate trusts, housing savings funds, and the stock market.

In particular, real estate investment and development are medium and long-term, but in reality, there is no sufficient mechanism to create medium and long-term investment and credit sources.

Meanwhile, if medium and long-term loans are accessible, their interest rates are higher than short-term ones. In other countries, medium and long-term loan rates are, however, lower than short-term ones.

Therefore, according to many economic experts, the credit squeeze may have a negative impact on the real estate market which has just recovered over the past two years from crisis.

Amidst credit by banks tends to tighten, businesses are focusing on their remaining capital sources - owners, home investors and customers.

In particular, the access to bond markets helps reduce dependence on bank credit. At the same time, after having bond proceeds, they can use them to fund projects.

Last but not least, the public is holding an enormous amount of cash, according to many experts. It is important to make the public know that investment is more beneficial than placing it at banks or keeping it at home. But, it is more important to make them trust in the channel they will put their money in.

Quynh Anh (Vietnam Business Forum)