Real estate loans should be redirected

Real estate credit is rising sharply

Bank loans for real estate have steadily increased in recent years. According to the National Assembly study, real estate credit increased steadily between 2015 and 2023. Specifically, from 2015 and 2016, real estate credit rose by 11% each year.

Since 2017, the State Bank of Vietnam (SBV) has begun to report separately on real estate business credit (loans to real estate firms) and consumer credit (loans to people for home purchases and renovation). However, from 2017 to 2023, lending for real estate businesses has constantly increased significantly. In 2017, real estate business credit rose by 9.2%...

By the end of December 31, 2023, real estate business credit had grown by 35.3%, well above the general credit growth rate; it stood for 30% of total real estate loan outstanding (with consumer real estate loans accounting for more than 70% of the remainder).

Loans for real estate continue to climb in early 2024. According to SBV figures, outstanding real estate loans would reach VND 3.15 trillion by the end of September 2024, up 9.15% from the previous year and 0.15% more than the general credit growth rate of the economy. Among these, real estate business credit rose by 16% (accounting for 40% of total real estate credit), whereas consumer real estate credit increased by just 4.6% (60%).

While, according to SBV figures, the total loan outstanding for the whole economy at the end of August 2024 was more than VND 13.56 million billion, up 7.31% from the end of 2023. While credit had grown by 9% by the end of September in comparison to the end of 2023, the total loan outstanding at the time was expected to be approximately VND 14.79 trillion. This indicates that real estate loans make up almost 21.3% of all outstanding loans in the economy. That is not a small figure.

Change in credit structure

The growth in real estate loans has naturally raised worries about the banking system's dangers. According to experts, even when the real estate market is thriving and liquidity is high, the dangers remain large. Because commercial banks' funding sources are mostly short-term, real estate loans have extremely long durations, with some stretching for more than 20 years. This might pose liquidity and interest rate risks for banks...

Furthermore, when real estate company credit expands, risks become concentrated rather than distributed, as they are with consumer real estate loans.

The quick expansion in real estate business credit, while consumer real estate credit is slowing, indicating that credit is now focused on the supply side (i.e., property developers), while the demand side is declining (i.e., house purchasers). This also creates several problems when supply and demand are out of sync.

The dangers are magnified since the real estate market is now plagued by several flaws. Currently, the bulk of real estate items on the market are in the high-end category, with prices fast growing above the average person's income and affordability. This results in poor market liquidity, which generates cash flow concerns for real estate enterprises.

According to Dr. Nguyen Tri Hieu – a financial expert, real estate companies often use financial leverage 4 to 5 times higher than their equity. That is a very high level. The higher the leverage ratio, the greater the risk of default.

The SBV is also fully aware of this danger; therefore, it has imposed various technical obstacles, such as the risk coefficient for real estate company loans (now 200%), and the maximum ratio of short-term deposits to medium and long-term loans has now been decreased to just 30%... At the same time, the SBV routinely reminds financial institutions to exercise tight supervision over loans to high-risk industries, such as real estate.

However, real estate credit is still quickly expanding. In light of this situation, many experts suggested that banks focus their credit resources on social housing projects, mid-range commercial housing projects, and affordable housing projects that meet people's actual needs, rather than focusing too heavily on high-end projects, as they currently do. Furthermore, real estate investment funds must be encouraged to diversify the real estate sector's funding sources, lowering reliance on bank credit and the corporate bond market.