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Maintaining capital flows
Minister of Construction Nguyen Hong Quan talks about Vietnam’s property market and measures that could make it healthier
What is your assessment of the development of Vietnam’s real estate market in recent times?
Vietnam’s real estate market has seen positive development and has contributed an important part to ensuring economic growth and social security. But besides the positive results there remain a number of weak points.
Firstly, the price of housing has increased and stands at high levels, and market complexity has created major challenges in management and oversight. Secondly, the structure of property goods remains out of balance. In previous years enterprises focused on investing in high-grade housing but the market gradually became saturated.
Many luxurious apartments were built but the number of customers who could afford them was very low. The market lacked prices that were affordable to most people and was especially short of housing for lease.
Thirdly, the real estate financial system was incomplete and the property market still depended heavily on monetary and credit policies. Capital sources for the property market primarily came from the banking sector and people’s savings. Mid- and long-term credit sources were largely unavailable, whereas the lending interest rate in the short-term was very high.
Fourthly, speculation, price hikes, and a trading psychology influenced by rumour and a “herd mentality” were still common, distorting and destabilising the market. Finally, the implementation progress of some property projects was slow, reducing supply to the market.
Many are concerned about a “property bubble’’. What are your thoughts?
There has been a lot said recently about the “bubble” in the property market bursting, especially after Resolution No.11 was issued by the government to curb inflation, stabilise the macro economy, and ensure social security. The resolution sought to reduce loans to non-manufacturing sectors, including real estate. Little of what’s been said is based on thorough analysis yet it impacted on public psychology.
It is difficult, in theory, for the real estate market to create its own “bubble” because the transaction value of a property is large and there are only a few cases where a group of people buy a property together. This means that the primary and secondary markets have fully developed. In Vietnam the number of real estate transactions is much smaller than in the non-commodity property market, especially in the housing field.
According to statistics, of the 85 million square metres of floor space built in 2010 only about 30 per cent were houses belonging to real estate enterprises, with 70 per cent being built by individuals (In both urban and rural areas) for their own personal use. The latter are not placed on the market and are mainly financed by savings and some bank borrowings. Credit in the real estate field only accounts for 9 - 10 per cent of the total at credit institutions and banks, of which bad debts make up around 2 per cent of all credit in the property business.
On the other hand, the secondary real estate market hasn’t formed a system of Real Estate Investment Trusts (REITs) to sell fund certificates to the public, instead only seeing some activities by foreign investment funds that mainly participate in investing directly in property projects. Moreover, demand for offices, hotels, commercial services and housing is still very high. So the “freezing” of transactions in commercial housing will only be temporary or only be in certain market segments.
I don’t mean that Vietnam’s real estate market isn’t at risk of a property “bubble”. Nonetheless, recent increases in housing prices sent a wrong signal about demand and payment capacity. Consequently, this led to massive investment in real estate by enterprises, even those with no experience in the sector and poor financial capacity, which triggered a rapid rise in loans for property projects.
What can be done to make Vietnam’s real estate market develop healthily and stably?
To regulate the real estate market so that it cannot contribute to inflation or reach a “bubble”, it is essential to control the effectiveness of capital investment flows in the real market, with the aim of preventing speculation and also avoiding shocks or freezing in the market. The market needs to be adjusted to develop in a sustainable manner.
Firstly, there needs to be control over the effectiveness of capital flows invested in the real estate market to prevent speculation and also avoid any shocks or freezing.
Secondly, it is necessary for management agencies to conduct research and create a legal framework to form non-bank financial institutions such as housing savings funds to support workers who wish to buy a house, and property investment funds to create additional sources of mid- and long-term capital for the market.
Thirdly, immediate measures need to be implemented to increase liquidity for credit contracts so that residential products will be able to join the market.
Fourthly, the feasibility of property projects in the planning and licensing stages should receive special attention from the State.
Fifthly, resources need to be concentrated on promoting key social housing programmes.
Finally, the inspection of the implementation of regulations on investment procedures, project progress, capital mobilisation and trade activities need to be strengthened.
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