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.