Real Estate Market Unlikely to Collapse

The real estate market has stagnated since November 2007, said Dr Le Xuan Nghia, Vice Chairman of National Financial Oversight Commission. This is truly a long time for a young economy like Vietnam.

Mr Nghia said the real estate price slump is caused by three main reasons: Tight monetary policy, oversupply, and sell-offs. He noted that the price drop primarily stems from tight monetary policy. Sell-offs are not a common trend, mainly in Hanoi and Ho Chi Minh City. And, as a result, the Vietnam’s real estate market will be given a face-lift if the monetary policy is loosened, interest rates are lower, and liquidity is stable, as bank loans and interest rates affect both real estate supply and demand. These are also the key factors that shape the development of this market.

 

The recovery or slump of the real estate market largely depends on the reduction of interest rates. And, the rate cut must be stable because this makes the people trust and invest in the market. Taking an example, Mr Nghia said Latin American economies are developing well but interest rates cannot be brought down because of weak liquidity. This is stemmed from the lack of public confidence in the banking system, as well as economic development. As a result, they are quite hesitant to deposit money at banks or make investments. Vietnam’s situation is similar. In Vietnam, inflation has quickly slowed down (expected at 7 - 7.2 percent or lower in 2012), but the interest rate is uncertain because banks are suffering liquidity strains.

 

Meanwhile, small and medium-sized banks will seek many ways to improve liquidity like borrowing on the interbank market, but this approach is quite difficult. Big banks have capital surplus, but the amount is insubstantial. This money is mainly used to buy government bonds or deal with future capital shortage.

 

The State Bank of Vietnam (SBV) plans to improve liquidity in the first quarter but it may realise this target in the second and third quarter instead, because liquidity strain is hard to be troubleshot, said Mr Nghia. This demands a real money source, he added.

 

Besides, banks are facing non-performing loan problems (a majority of loans are given to real estate market). According to experts, group benefit in the Vietnamese banking system is becoming an alarming problem.

Citing evidence to this, Dr Nghia said that although Vietnamese banks’ bad debts are higher than those in regional countries, their profits are also higher. “Profits are shared with shareholders while bad debts are laid on the shoulders of the Government,” Mr Nghia said frankly.

 

So, when will the Vietnamese real estate market revitalise before so many difficulties? Dr Nghia said, “Once the liquidity problem is resolved, the real estate market will see hope of rescue.”

 

According to Professor Dang Hung Vo, there are now no real estate sell-offs in Vietnam. Some price-cutting projects are mainly located in unfavourable areas and they are even unattractive when the market is warm. Obviously, many weak investors collapse when the market is unfavourable.

 

Mr Vo added that the slump primarily comes from tightened monetary policy, but not all segments are affected by the markdown pressures. Prices of residential homes and street houses still go up, although fewer deals are reached. This lacklustre performance is caused by economic slowdown. Vietnamese people are keener on residential houses than on apartments. But, in the coming time, Vietnam will continue to develop apartment blocks (accounting for 80 percent of houses to be built).

 

According to Professor Vo, investors will spend their money on real estate if their investments have a good future. To solve capital constraint for the real estate market, “the Government should allow property mortgages at foreign banks. This is a big and quick funding channel,” he said.

 

Remarking on real estate market scenarios for 2012, he said: “[We] should look at the real estate market with more positive eyes.” The market is undergoing a makeover to become a healthy, useful entity for the sake of houseless people. Hence, restructuring will be the face of real estate market in 2012. In a good scenario, the affordable housing segment may be able to recover in mid-2012. In a bad scenario, it may happen later. The apartment segment will see prices drop sharply, especially in high-grade accommodation. Speculative investing will reduce because of lower margins. Professor Dang Hung Vo concluded that the real estate market is unlikely to collapse and it may recover by the end of 2012.