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.