What Can Rescue the Vietnamese Property Market?

What Can Rescue the Vietnamese Property Market?

Ho Chi Minh City Vietnam

Vietnam’s property market was once one of Asia’s hottest.  But in recent years it has cooled and officials blame both speculation and banking practices for the constriction of the sector’s financial arteries.

Vietnam’s property market is the country’s most popular sector for foreign investment, according to online newspaper VietnemNet.  Data released by the National Finance Supervision Council showed $9bn of foreign money invested in Vietnam in 2011, and 52% of this found its way into the property sector.

However, Vietnam’s economy has not remained immune from the events of the outside world.  Low demand has resulted in weak liquidity, and high inventories continue to restrict economic activity by holding investors back from paying their debts.  Many businesses faced bankruptcy or closedown due to issues concerning high inventory and debt, and the industrial index declined markedly in 2011-12, falling 21% between January 2012 and January 2013.  Although Vietnam’s long-term outlook remains bright, with the country tipped by HSBC to become the world’s 41st largest economy by 2050, the immediate future is problematic.

As far back as August of 2012, Vietnam’s property sector experienced a crash one official compared to the 2007 crash in Thailand.  Hua Ngoc Thuan, chairman of the People’s Committee of Ho Chi Minh City, layed the blame at the feet of property speculators who he said had ‘pushed the prices so high.’

The bad debt issue is also a major worry for the Vietnamese economy as a whole.  Jonathan Pincus, an economist in Ho Chi Minh City, warned the Economist that the banking crisis ‘is going to constrain growth for a serious amount of time unless it’s dealt with.’

The seriousness of the bad debt problem in Vietnam is underlined by the State Bank of Vietnam’s upwardly-revised estimate of the bad debt in the country’s banking system, at 8.8%; that’s already the highest in South-East Asia, but the bank Standard Charter puts the figure at between 15% and 20%, perilously close to the 20% national credit cap and consequently posing the danger of paralysing the banking system.  After Dr Tran Du Lich of the National Financial and Monetary Policy Advisory Council used the phrase in 2012, the combination of bad debts, poor liquidity, inappropriate regulations and long-lasting large inventories is now commonly called Vietnam’s ‘blood clot.’

For foreign buyers Vietnam presents several unusual obstacles.  It’s impossible to own land there, it must be leased from the state, and the mortgage rate is 13%, set deliberately high to cool a roaring market and combat Asia’s steepest inflation rate.  Additionally, property purchases will usually be conducted not in dollars or in the Vietnamese Dong, but in gold.

With the difficulties mounted against them it might seem no wonder that foreign investors are less involved in the Vietnam property market than they were recently, but it’s unlikely to be the peculiar regulatory environment that has deterred them.  More probably it’s a property bubble that has just burst, with such overinventory that Nguyen Duy Lam, director of construction and real estate company Pacific Real, told the New York Times that ‘everyone wants to sell, but they can’t even if they lower the price.’

The State Bank of Vietnam (SBV) is trying to use injections of foreign capital to rescue banks it thinks worth saving while urging others to merge.  Some Japanese banks have taken an interest and the SBV has submitted a draft decree to allow foreign investors to take up to 30% interest in Vietnamese banks, up from the 20% limit at present.  Following a European lead, the Vietnamese government has also announced plans to set up a ‘bad bank’ to handle all the sector’s bad debts.

However it comes about the property market in Vietnam is not expected to recover without reform of the Vietnamese banking sector, and this will take time.

Photo credits: Marcel via Flickr