Wary of real estate risks

FDI to real estate accounts for a relatively small share

The persistence of COVID-19 overshadows existing risks to growth in many countries. In the case of Vietnam, it is the real estate sector. In this month’s Vietnam at a glance, we look at recent developments in the property market. However, the lack of official data makes it increasingly difficult to grasp the overall picture of the market. We rely on publicly available information (e.g. media reports and real estate service providers) to better understand the sector, and to lay out the key implications.

Vietnam’s policymakers have been keeping a keen eye on the real estate sector in recent years. Indeed, the property market is essentially too big to ignore. Real estate activity accounts for between 5% and 15% of GDP in ASEAN, and in the case of Vietnam, the ratio is around 8% of GDP. More importantly, the memory of a housing bubble of 2007-12, which ultimately led to a prolonged banking crisis, looms large in the collective conscience. Even after a gradual recovery in the banking sector, real estate loans continue to account for a large proportion of bank balance sheets. While some banks do not have a specific classification on loans to the real estate sector, balance sheets of the “Big-4” SOE banks reveal a key linkage with the associated construction sector. After all, Vietnam still relies heavily on high credit growth to fuel its economy.

While the real estate market has been hit by the pandemic, there are signs that it is recovering. Although output fell in y-o-y terms in 2Q20 and 3Q20, it registered a strong rebound 4Q20. The same can also be seen in terms of improving new launches and sold units since 4Q20 (CBRE, 6 March 2021). Meanwhile, media reports frequently indicate that property prices continue to rise. Take Ho Chi Minh City (HCMC) as an example, the average property price rose 11% y-o-y as of 3Q20. Like many countries, this is partly due to accommodative monetary policy that offers low interest rates and abundant liquidity. Meanwhile, it is also driven by a sharp rise in the price of luxury condos, growing 9% y-o-y in 2020 vs. a 4-5% y-o-y price increase in the mid-end and affordable segments (CBRE, 6 March 2021). Demand for luxury and high-end properties remains elevated, with their market share increasing less than 30% of total units sold in 2019 to more than 70% in 2020. FDI data suggests that even though new FDI inflows into the real estate sector increased more than 200% y-o-y as of May, FDI was largely concentrated in manufacturing. This means that price rises are mainly due to domestic investors.

Loans to real estate and constructions sectors in “Big-4” banks

There is no question this has attracted the attention of policymakers. In mid-April, SBV’s Governor Nguyen Thi Thu Hong called for commercial banks to enhance their risk management operations, vowing to step up measures to tighten credit allocation in risky areas, including real estate (Hanoi Times, 15 April 2021). The rapid growth of credit since the beginning of 2021 was cited as the main reason. Available data suggests that credit growth in the real estate sector accelerated to 15% y-o-y in January and February, exceeding the SBV’s target of 12%. By mid-April, total credit growth reached more than 15% y-o-y (Hanoi Times, 22 April 2021).

This is not the first time that the central bank has tightened its control over the property market to mitigate risks. The SBV has historically preferred to use macro-prudential policies to curb credit lending to the sector, targeting real estate developers rather than mortgage borrowers, as Vietnam still has a low mortgage penetration rate in ASEAN. Mortgages account for between 40% and 90% of total household debt in the region, but the ratio is only about 25% in Vietnam according to the IMF. In Table 1, we outline a list of key macro-prudential measures introduced by the SBV over the past five years. Evidently, tightening the ratio of short-term funds that banks could use to fund medium-to-long-term projects serves as one of its main tools.

That being said, the SBV is facing a delicate balance of curtailing excessive credit lending to real estate developers while reducing imminent COVID-19 risks to the sector. After all, the sector is also an increasing source of growth. In August 2020, the SBV delayed a roadmap to tighten capital requirements for one more year. Under the revised regulation, the SBV will lower the maximum ratio gradually 40% to 37% in October 2021, then to 34% in October 2022 before lowering it further to 30% in October 2023. The tone of the current guideline sounds similar to Document No.563 in 2018, which is more of a generic guideline that signals the SBV’s close watch over the property market. If the property market shows more signs of overheating, there is scope for the SBV to do more, such as introducing more restrictive macro-prudential measures or further tighten its quantitative quota. That being said, there is also a risk that the most recent wave of COVID-19 may complicate the process, given the adverse impact on Vietnam’s growth.

Over the years, the SBV seems to have used monetary policy as a tool to support growth whereas it uses macro-prudential policies to manage property market risks. Still, we expect rising housing prices to constrain the SBV’s ability to deliver any further rate cuts. Fiscal policy should be tasked with the burden of providing immediate targeted support amid the latest outbreak of COVID-19. The Ministry of Finance has proposed extending fee reductions for another six months until the end of 2021 (Vietnam News, 2 June 2021).

In short, it’s encouraging to see that the authorities are concerned that the housing market may run away economic fundamentals, and are thus keeping an eye on the country’s real estate market. If needed, tighter macro-prudential policies could be used to further contain risks. That being said, this requires a delicate balance, given increasing downside risks to growth.