The new regulation on expanding credit to real estate developers and buyers will not make property prices rise, but keep them at an artificial high instead of reducing them to their real value, economist Bui Kien Thanh tells Vietweek.
Vietweek: Amidst increasing bad debts in many sectors, the State Bank of Vietnam has decided to loosen lending to real estate sector. How do you assess this move?
Bui Kien Thanh: Most real estate projects in Vietnam are in the luxury segment where customers are mainly speculators. Few people with real demand can buy such houses to live because of their high prices. The high-end houses are mainly traded among speculators. I think the state would not gain any benefit from encouraging this property speculation.
To facilitate people buying houses to live, it's time for us to restructure the whole real estate sector. We should consider housing prices that medium-income earners could afford. The prices I think should be less than VND10 million (US$475) per square meter. The credit regulations should also be changed to allow longer-term loans, may be 10-30 years, and the interest rate should be decreased further.
In other countries, the annual interest rates are 5-6 percent. In the US, it is just 3-4 percent. With such interest rates, people can afford to buy houses.
Many banks are facing bad debts after they granted big loans to the real estate sector. Could this happen again as banks expand loans to property projects?
It will be difficult for this to happen. Many developers cannot continue to borrow capital from banks as they have already taken out huge loans from them and now do not have enough assets as mortgage for new loans. They have to repay existing loans before accessing new ones, and liquidity is very tight right now.
Others will not dare to borrow because of worries they will find no customers for their housing products amidst the gloomy real estate market.
Thus, the central bank's decision can only be a small support to some developers who need more capital for their operations. It will not bring much benefit to the economy as a whole.
Furthermore, many banks that have too many bad debts will not want to continue lending to the property market, as many real estate firms have already taken big loans.
Real estate prices are too high now, exceeding the income of most of local people. Could the loosened credit policy distort the market, raising the prices further?
The prices will not continue rising, but will still stand high instead of reducing to their real value. Although the interest rates have been lowered, they are still too high, failing to encourage people to buy houses. Meanwhile, property prices have exceeded their real value by many times. So, local people expect that the prices will reduce to their real value. Property prices have recently decreased, and are expected to keep falling over the coming months. Meanwhile, the current interest rate of around 16 percent each year is not a preferential one to consumers.
Interest rates have been raised, in an unreasonable manner, to a high level since 2008. Before the year, lending interest rates had never increased to over 20 percent, and deposit rates to 17-18 percent as happened recently. Credit for property sector has developed in an unprompted and disorderly manner in recent years.
Consumers should buy houses at their real prices. The prices will go down to that level sooner or later, so there is no reason for people to buy houses now.
Some banks have said they have reduced their interest rates to facilitate purchase of houses by low-income earners. In fact, it is difficult for even medium-income people to purchase them.
Priorities for low-income or medium-income people to buy houses are expressions of the subsidized regime. Vietnam's credit system has developed only at a primary level, so it has not yet been able to offer loans at low interest rates to people who want to buy houses to live. Thus, the state should consider a credit regime that could can facilitate customers with real housing demand.
We should develop a real estate market with real values. The state should sell land to developers at low prices, for example VND2 million per sq.m, so that they could sell their housing products to customers with prices of VND7-8 million per sq.m after adding construction costs of VND4-5 million per sq.m and their profit of some 10 percent. At such prices, local residents can buy houses. Now, our real estate sector is participated in mainly by speculators, so the state should readjust regulations.
The best way to develop the real estate market is to bring property prices to their real value. If we support developers, helping them to retain the high prices, they can only survive for a short time only. Later they will die out because there will be no customers.
In other countries, there are different credit policies for investors in real estate projects and people who buy houses to live. To access bank loans, investors need to demonstrate the feasibility of their projects and their loan repayment capacity. People who want to buy houses for living (not speculating) are supported by the government with long term, low interest bank loans.