“Extreme tightening of real estate credit would cause the economic recovery plan in the post-Covid period to fail and make the 5-year socio-economic plan 2021-2026 unattainable,” said Nguyen Minh Phong, a respected economist. 

Citing a survey by the Vietnam Real Estate Association that real estate makes up 14 percent of GDP, Phong said tightening  credit for the real estate sector would be like cutting off blood vessels, which would cause the real estate market to freeze, causing serious long-term consequences to the national economy.

Vietnam is endeavoring to recover the economy and seek a driving force to offset record low growth rates in 2020 (2.9 percent) and 2021 (2.58 percent, the 30-year low).

“The economy is like an athlete who has just been seriously injured and is now just starting to return to the race track. If the ‘credit of blood vessels’ in an important business field are cut off, the athlete won’t be able to reach the finish line,” he explained.

Phong said that for many years, real estate remains among the top 3 business fields that most attracts foreign direct investment (FDI), thus bringing imported resources for economic development. In 2021, Vietnam attracted $2.6 billion worth of FDI to the business field, which accounted for 8.3 percent of total FDI capital. If credit inflow stops,  liquidity will be weakened and the market will freeze, and FDI would slide.

Phong said the goal of mitigating risks to the banking system by tightening real estate credit may bring side effects. In principle, there exists a close relation between creditors and debtors, banks and enterprises. Only when enterprises make profit will they be able to pay debts to banks. 

“Reducing or stopping real estate lending would lead to a serious consequence – an increase in bad debts for loans provided or real estate bonds purchased.” he warned.

Dang Hung Vo, former Deputy Minister of Natural Resources and the Environment, also pointed out that real estate serves as both input and output of production. The development of the real estate market leads to development of 35-40 other business fields such as building materials and construction engineering. If credit stops, the real estate market would come to a deadlock, both in the high- and low-liquidity market segments.

“We are trying to stop real estate fever and prevent inflation risks, but we need to be clever enough to avoid big deflation which can cause a recession,” Vo said.

Solutions

While agreeing that it’s necessary to take action step by step to make real estate credit healthy, experts stress that targeting the rights subjects and spheres is important. The extreme blocking of a ‘credit valve’ would lead to  misfortune for some and cause a chaotic market. If so, the first victims will be those with real demand for accommodation.

According to Vo, the average housing area of Vietnamese people is low, just 23.2 square meters per head, while the figure was 25 square meters tens of years ago globally. The demand for accommodations in Vietnam is very high and many buyers need to use financial leverage to buy houses. If banks stop providing home loans, the hope of millions of people to own homes will be dashed.

He stressed that the number of people borrowing money to speculate on real estate is not high. In recent years, the supply of houses has not been high enough to satisfy demand. The ‘demand’ not only means accommodations for current use, but also savings for children.

“In a family with three children, parents need to prepare three houses, and this should not be considered ‘speculation’,” Vo said. “If tightening credit severely, this may lead to the market freezing and bad debts.”

“When real estate developers have low capability and when real estate projects cannot be implemented, risks and loans becoming irrecoverable will increase. The situation will be within the safety line if project developers are prestigious and the legal status is clear, and the execution goes smoothly and liquidity is strong.

“The extreme tightening of real estate credit will equate professional real estate developers with developers with weak capability. This will not help make the market healthy or lead to market development,” Vo said.

Le Hoang Chau, chair of the HCM City Real Estate Association, warned that if real estate developers cannot access bank loans, they will not have capital to implement projects.

As a result, the projects cannot be completed. The time for implementing one project is relatively long – 5-10 years. Any troubles would cause project implementation to fall into deadlock. This would lead to a supply shortage which will push housing prices up.

Chau said his association has sent a dispatch to the Prime Minister, saying that immediate tightening of real estate credit and issuance of corporate bonds will cause difficulties for the real estate market, real estate firms, investors, consumers and credit institutions.

Minh Son