Vietnam is not in aftermath of a real estate's bubble: VinaCapital economist

In a typical real estate “boom and bust” cycle, banks lend too much money to property speculators and real estate developers, which results in the market becoming vastly oversupplied with new housing units, which is not happening in Vietnam, writes Michael Kokalari, chief economist of VinaCapital.

At some point, the supply of credit dries up, crashing both real estate prices and property development activity. The market then languishes for years as it digests the existing oversupply of empty housing units.

This is not what is currently happening in Vietnam. Real estate development activity ground to a halt but not because there is an oversupply of empty housing units; Vietnam’s vacancy rate is below 5%.

Property development activity in Vietnam ground to a halt because of a confluence of legal and regulatory issues that make it very difficult to get new projects approved as well as certain market inefficiencies in financing the development of greenfield property projects. Critically, property prices in Vietnam have not crashed since the demand for new housing units outstrips supply by a factor of 2-to-1.

That said, the prices of some selected properties have dropped, especially if the homeowner not yet received a proper legal title from the developer, which in-turn is because the developer had not attained proper permissions to proceed with the project from the outset.

Also, the prices of some properties that are poorly located or in geographies oversaturated with new housing units have dropped after having increased too much during what was admittedly a slightly frothy market in 2021 and early-2022.

Overly negative sentiment

Consumers and homeowners in Vietnam are peripherally aware of issues in the real estate market, and they occasionally read sensationalist headlines that property prices are plunging, prompting a reflexive reaction to limit their spending. But those sensationalist headlines do not reflect the reality of Vietnam’s real estate market.

For example, in December, a headline in one newspaper claimed “HCMC apartment prices drop 20%,” which is not true. That article conveyed a few anecdotes, including of a 15% drop in the price of apartments in one particular building but then explained that the building “has been under construction for 8-10 years, yet title deed has not been issued”.

The same newspaper published an article a month earlier lamenting that “Affordable apartments are disappearing in Hanoi, HCMC”. We highlight this cognitive dissonance because misperceptions about the true health of Vietnam’s property market weighed disproportionately on consumer sentiment last year. Consequently, the growing perception that the country’s real estate market has started to thaw (which we discussed in this report) should boost consumer spending as 2024 progresses.

The thaw has started

Recently, there have been a few very successful sales launches of well-located residential projects by leading developers, with over 80% of the units offered for sale sold immediately. Hopes are high that a special session of the National Assembly to be held later this month will resolve some the remaining roadblocks in the country’s real estate development market, which would probably also push the overall stock market higher.

There are numerous indications of increased urgency within the government to fix the issues impeding the country’s real estate market. The government recently projected an increase of well over 50% in the revenues derived from land-use rights fees on newly approved real estate projects in 2024, implying a significant increase in new project approvals. Furthermore, the government has directly intervened in a growing handful of specific projects to resolve the legal and regulatory issues impeding those projects.

Many experts predict that the Vietnamese real estate market will recover around the third quarter of 2024, but some others hold that 2024 will continue to be a difficult year for the market.

According to the Ministry of Construction (MoC), with drastic measures taken by the government, the Prime Minister, the MoC and localities, the property market situation showed positive signs in the second half of 2023, with increasing supply and transactions in the land plot and apartment segments.