Consequences of real estate bubble in Vietnam

The victims of real estate bubble consists all walks of life, from blue collar workers to the wealthy bankers. When the real estate bubble  occurs, people who have to suffer the most are those who mainly rely on based salaries, and have real needs (mostly are immigrants to big cities). The real estate prices have been driven too far from the real value by the greedy speculators and completely unaffordable for the immigrants.  With the monthly income around only 300USD, one person needs to save his (or her) salary (without making any consumption) up to 15 years to buy a small house which is offered for low income people (Vietnam General Statistic Office, 2011). While there are many newly constructed apartments remain empty, a lot of people have to live in cramped houses (which were built few decades ago) or in shabby boarding houses.

When the real estate bubble begins to deflate, the speculators who used to enjoy vast profit when the market was in the heyday are those have been hit first. The real estate prices dropped too sharply and too fast beyond any expectations in early 2008 lead them to a non-resistant situation. They sell out real estate massively to recover capital despite suffering the huge lost. However, many of them have to hold on real estate assets reluctantly as investors have lose  their faith in the market and although the prices have reduced a lot but they are still out of reach of people who have real demands. Consequently, the real estate market has been almost paralyzed. Since the early 2008 until now, the quantity and the value of the transactions have significantly decreased (Vietnam General Statistic Office, 2011). Recently, the real estate prices are still continuous dropping since the prices have been far from the real value and the market has no signs of recovery.

Nevertheless, middle class people are those who affected the most when the real estate bubble bursts. Before the market reached its peak, the real estate prices changed every day and moved along an upward sloping. The daily newspapers were always covered with the images and stories of people who got rich quickly by investing in real estate. Therefore, more and more people who want to make quick profit are interested in investing in real estate. Apart from people who use their own money (savings, pensions) to invest, a lot people use borrowed money to invest. For those people, they also have to bear the burden of paying interest, and face with the threat of default. In order to delay the default, there is a number of them choose to mobilize capital from black credit market as it has still existed in Vietnam regardless the fact that it is illegal and strictly prohibited by the government. They usually offer very high interest rate; in some cases it is up to 30- 40% per month to attract lenders (Thanh nien news, 2011). Most lending transactions are taken place between relatives and acquaintances, no collateral required, no witnesses, only record by simple handwritten or even oral agreements.  . This action extends the scope of affected subjects due to the real estate bubble. People who lend out money through the black credit market also have to suffer due to the real estate bubble. The distress of the real estate market forces investors to seek for new investment channels which can generate high profit. While the saving interest rate offered by the banks is only 14% per year, middle class investors prefer to invest in black credit market. Since instead investing money in investment activities, those borrowers only use money to pay previous loan, after making the first few interest payments to the lenders they will run away.  In lately 2011 and early 2012, many insolvency cases due to black credit have occurred with the totalling hundreds of billions VND (Thanh nien news, 2011).

Banks are also directly affected by the real estate bubble. Due to the fall of the real estate bubble, there are many real estate loans cannot be reclaimed, it leads to the increase of the bad debt ratio of the banking system, and has negative effects on the performance of the entire system.

In the next post, I am going to discuss why the real estate bubble has not popped and just deflated.

Why the real estate gone wild in Vietnam?

This post attempts to provide an insight into the real estate bubble issue in Vietnam, and hopefully partially explain why the real estate bubble has taken place in Vietnam. Real estate bubble occurs when the value of real estate increase rapidly and decline once the prices reach some limits. So what the determinants that have driven the real estate prices?  Although the real estate bubble does exist in Vietnam but it does not spread all over the country, and seems to be just the matter in big cities. The real estate market in Vietnam is not unified. The prices are extremely high only in big cities (like Hanoi, Ho Chi Minh, and so on where many government agencies and big companies are located) because the demands for real estate in those cities have been always high. It is due to the wave of immigrants to big cities (where there are more available jobs and the earnings are much better than working in rural areas). Furthermore, it is the consequence of the fact that the infrastructure in Vietnam is not built and developed synchronously (e.g. the quality of hospitals and schools in suburban areas are far behind the quality of those in inner cities, it is also the same in extents of services, and of course, living standard). As the matter of fact that real estate has been always in hot demands, local investors usually regard real estate investment as one of the most profitable investment channel which they can easily approach. They keep buying in with the thought in mind that despite no matter what happen they still can make some gains as the demands are real and very big.

                                                     
                                                                People jostle to buy department in Hanoi

The boom of the stock market in 2007 was also one of the reasons that creating real estate bubble. There were many stock traders used the profit they earned from investing in stocks to buy real estate since in their point of view they always regard it as one of the most profitable investment channels. This drove the real estate prices crazily. Moreover, thanks to this boom, a series of banks were established by companies which     made a lot of money through listed in the stock market. In order to attract customers, they relaxed lending criterias and offered loans at attractive rates. Thus, many people borrowed money from banks during that time to invest in real estate and made the prices increased continuously.

One determinant that makes the real estate bubble in Vietnam become more severe is the characteristic of local investors. Most of them are individual investors who invest to make quick profit, not for long term purpose. They are not professional in trading real estate; as a result they just follow big investors and based on rumors to make decisions. In other words, they are not different than gamblers. Their investment decisions are usually leaded and influenced by wealthy and greedy speculators. In Vietnam, if an investor makes a huge profit from investing in real estate, usually he (or she) would say “How lucky I am” rather than “My judgments related to that investment were right”.  In addition, due to the limited ability of investor in analyzing and judging the market of local investors, they also rely on the analysts and policy makers of the government. Since a lot of them made very optimistic assessments about the prospect of the real estate market in Vietnam before the bubble occured, investors had more confident in investing in this  kind of investment. As a result, the demands increased and it leads to the supreme increase in sale prices.

                                                                                       

There are other two determinants which we cannot miss out. First, the lack of transparency of project planning real estates in big cities  create opportunities for speculators and insiders to manipulate the market and drive the prices far away from the real value, whilst buyers with real demands have very little access to make investment. Second, when performing real estate transactions, buyers and sellers do not use currency base, but gold base. The prices of real estate are rated by gold. While the gold price has been continuously rising in recent years, the real estate prices also soar.

All of these above reasons make up a funny fact and may surprise many people that: Although Vietnam is an emerging country with the GDP per capital around 1,300 USD/ year (figure achieved in 2011), but the real estate prices in big cities (like Hanoi, Ho Chi Minh) are no less than the prices in rich countries. For example, houses which face to the big roads and locate in central districts, for each m² the buyer must pay around 40,000 USD (Citi Private Bank, 2011). This paradox is the apparent evidence of the real estate bubble in Vietnam and it currently has negative impacts in regards of people’s lives, economic development and the banking system of Vietnam. In the next post, I will discuss this issue further. 

Real estate bubble in Vietnam: An overview

 

Source: NYTimes eXaminer

The huge decrease in the real estate sale in Vietnam has recently drawn attention of many analysts and policy makers as it has accelerated the concern that the real estate bubble has started to deflated and may burst in near future.  This sombre picture of the real estate market currently has posed significant impact on the economy of Vietnam in general and individual investors’ wealth in particular.  One of the main reasons which have lead to the occurrence of the real estate bubble is the investment behaviours of Vietnamese investors. Almost investors have focused on traditional investment channels, especially real estate  because of the following reasons: i) they are familiar with this kind of investment; ii) it is easy to approach; iii) there are not so many financial instruments available to them.  Furthermore, investors are usually influenced by the "crowd effect", they tend to follow the success of other investors rather than studying the market to make investment decisions. With the rise of the number of vastly wealthy people whose most money comes from investing in real estate, more and more people engage in trading real estate. Apart from investors who have used their savings and pensions to invest and just account for a small proportion,  many investors have borrowed money from the bank to invest in real estate with the hunch that the price would keep rising in future. Consequently, the real estate prices are being pushed far way from the real value and manipulated by speculators. However, only one objective reasons cannot creat such a huge mess in the real estate market, it is because thanks to the assistance of a number of other subjective  factors, the bubble gradually has become bigger and bigger and now when the government has imposed policy to tighten the access to bank credit, it may burst in any time. In the next post, I am going to clarify the determinants which have taken part in creating the real estate bubble in my point of view.