Real estate market faces headwinds in 2023

Though strong economic growth would help drive up Vietnam's real estate market, analysts believe many challenges await the sector this year because of lingering economic headwinds.

Breakthrough year

Long Phan, CEO and founder of financial service provider AFA Group, named four factors affecting the real estate market.

First, accumulated personal incomes. As the property market is a long-term investment market, people need to accumulate their money to make investments.

The market recorded strong growth in 2015-2021, thanks to Vietnam becoming a net-export country with rising foreign reserves, pacey economic growth, and steep increases in incomes. Prior to that, the real estate market reached its bottom in 2014, due to hardships faced by investors and real estate businesses during 2011-2013, with some going bankrupt.

Second, infrastructure heavily impacts the real estate market, especially developing countries like Vietnam. A property’s value lies partly in its prime location and accompanying utilities. As public investment is poised to grow fast in 2023, the real estate market might see a breakthrough year.

Third, tightening credit policy majorly affects the market. It faced serious troubles in the second half of 2022, with the number of property brokers going down 70%, property businesses experiencing a liquidity crunch, and some segments recording zero transactions. In the past, the real estate market begins its downfall with rises in loan interest rates and changes to the legal framework.

Fourth, higher interest rates. Banks can provide capital to house builders, contractors, and buyers. However, last year, loans were limited amid tightened credit control. Besides, loanees are subject to difficulties as interest rates are hiked.

Phan said the real estate market flourishes when economic growth is strong. In 2000-2001, when Vietnam started integrating into the global economy, the property sector went up along with high transaction volumes. Then in 2005-2006, as the country joined the World Trade Organization (WTO), the economy blossomed, leading to high credit growth of over 30% and the gain of the real estate market.

However, the market fell in 2008-2012 due to the economic crisis but then rebounded from 2014.

Since 2015, amid cheap monetary policy, infrastructure has majorly developed with newly-established skyscrapers, giant urban areas, and foreign direct investments in coastal and industrial properties. Phan noted that strong economic growth resulted in higher personal incomes, prompting citizens to accumulate money and invest in properties.

He added the strong growth of the stock market normally lead to similar responses in the real estate market a year later, because the fruitful securities market provides more resources for investors. As the stock market went down in 2022, gloomy outcomes are expected for the real estate market this year.

Four major challenges

Low accumulated personal incomes are a challenge this year. Meanwhile, VND46,145 billion ($1.97 billion) of corporate bonds are set to mature in the first half of the year, and a further VND64,185 billion ($2.74 billion) in the second half, pressuring investors to repay their loans. Besides, high interest rates and tightened credit room for real estate also impact the market.

However, data of securities broker VnDirect pointed out that current financial conditions of listed real estate firms are better than in 2011-2013, therefore, the downtrend period is expected to be shorter with lesser damages.

It is expected that the average price of primary apartments will decrease by 5-10% year-on-year and the number of sold apartments would decrease by about 20% in 2023, versus 20-30% and 50% decreases in 2012-2013, respectively.

VnDirect also expected the amended land law to be issued in the second half of 2024 will help solve legal troubles in approving new housing projects, aiding housing supply from 2024-2025.

During this time, to avoid risks of tightening credit, investors should focus on reputable projects with completed legal procedures and infrastructure, which are available for sale this year. They should focus on mid-range and affordable apartments as they are driven by real demand, stable earnings growth, and healthy balance sheets (low leverage, high liquidity), according to the broker.

Meanwhile, for homebuyers, rising interest rates will cause great pressure. According to VnDirect, by the beginning of December 2022, home loan interest rates of state-controlled and private banks increased sharply by 190-250 basis points to 11.1-12% compared to end-2021, after deposit rates rose. Deposit rates may increase by more than 50 basis points in 2023, leading to an increase in mortgage lending rates of private banks to 12.5-13% this year.

The brokerage house detected an increasing risk of loan default due to escalating house prices and rapidly increasing home loan interest rates in 2022-2023. Homebuyers will find it harder and harder to access even mid-end apartments at about VND47 million ($2,002) per square meter in Ho Chi Minh City and Hanoi. Furthermore, the situation could be even more difficult this year as many homebuyers will run out of preferential interest rates and have to face surging interest rates.

In HCMC, it is forecast that the new supply of apartments this year will be 10% lower year-on-year at about 19,000-20,000 units, while the number of sold units will go down 20% to 15,000. Absorption rate may continue to decline to 80% as homebuyer sentiment remains bleak.

It is expected that the primary price of apartments in all segments this year will decrease by 5-10% against last year. Investors may continue to offer some primary discount programs to stimulate demand in the context of rising home loan interest rates and credit limits.

In Hanoi, the supply of new apartments will be stable this year with 20,000-22,000 units open for sale. The absorption rate will reach about 90%, down 13.5 percentage points year-on-year due to the worsening sentiment of homebuyers, equivalent to 18,000-20,000 units sold this year.

The selling price of primary apartments will decrease slightly by 3-5% year-on-year and more discount programs are expected for homebuyers who do not use bank loans to stimulate demand amid rising mortgage interest rates and credit restriction.