Vietnam to suffer from a real estate bubble?

Since the beginning of the year, profits of many real estate businesses in Vietnam have skyrocketed because of increasing land prices.

 

Huge cashflow into real estate

 

Vietnam’s real estate sector is recovering faster than any other industries despite the Covid-19 epidemic. Q1’s profit of real estate companies increased sharply, which is evidenced by the fact that net revenue of listed residential real estate groups increased by 49% over the same period last year, while profit after tax increased 50 times.

 

According to Dr. Dinh The Hien, a Vietnamese financial expert, the real estate market has "absorbed" financial supports from banks very well. Thanks to low interest rates, investors are racing to "catch the bottom" with the expectation to enjoy huge profits when the epidemic is well controlled.

 

Newly updated data of the State Bank of Vietnam (SBV) shows that by the end of April 2021, credit growth in the real estate sector reached 4.84% compared to the beginning of the year and is expected to reach 5.5% at the end of June.

 

In fact, bank credit in the real estate sector is not as high as that in previous years because state management agencies have made many moves to control the situation, and even banks themselves have recognized the risk of overheating of the industry.

 

However, cash has still flowed into real estate through the bond channel. The research department of SSI Securities Company assessed that the demand for capital mobilization through the bond channel of real estate businesses is still quite high, especially those with limited collateral for loans. This is reflected in the high interest rates on real estate bonds, which are more attractive than other types of bond.

 

According to HSBC, the increase in average real estate prices is a result of the loosening monetary policy, which facilitates the reduction of interest rates and the abundant liquidity of the banking system. As a result, land prices in several places skyrocketed, many of which were “virtual fevers”. This phenomenon immediately triggered the "fear" about the possibility of a bubble in the context that real estate is not a priority area for credit growth.

 

Controlling the cash flow

 

At a recent press conference of the State Bank of Vietnam, Mr. Nguyen Tuan Anh, Director of the Credit Department for Economic Sectors, said that the land prices in some localities have shown signs of decreasing, after the information on land prices and planning of the projects were made public under the direction of the Government.

 

Mr. Tuan Anh said that the State Bank always closely monitors price fluctuations because this market always has potential risks. In fact, the SBV has continuously issued warnings about real estate credit risks in recent years. Concerns focused on high credit growth, large proportion of outstanding loans, etc.

 

However, HSBC believed that that the recent Covid-19 outbreak may make it difficult to enact and enforce restrictive policies because Vietnam's growth is still mainly based on financial leverage, which leads to concerns about a negative impact on overall growth.

 

In the context of the regulator facing pressure to balance the appropriate cash flow, the real estate market is also expected to face many difficulties in the coming time.

 

In the future, the simultaneous and sudden increase in real estate price is not likely to happen again, except in areas with special favorable factors such as construction of infrastructure or planned projects.

 

Starting from the second quarter of this year, there will be fewer customers while bank loans are due. In some places, investors can lower the selling price to collect cash. In fact, in the first quarter, many investors quietly reduced prices in the name of supporting policies of banks.

 

According to Mr. Hien, the market will only really improve when the Covid-19 epidemic is controlled. However, he also emphasized that apart from problems caused by cash flow, Vietnam’s real estate market will continue to be like a bubble because current real estate product development is based only on the continuous increase in land prices, which is far beyond the actual exploitation value.

 

 

Source: VietnamCredit