Old pending problems have yet to be resolved, with even hundreds of housing projects on hold due to procedural delays, which is adding to building costs and causing customers to lose faith.
Procedural delays
Many other localities are also facing difficulties, especially emerging provinces in the real estate market such as Binh Thuan, Nha Trang, and Phu Quoc. Once any real estate project starts, the prices begin to skyrocket, because of sharp hikes in raw material costs while demand has slowed, becoming almost nil.
Legal procedures in housing projects have also been a constant problem for real estate companies. Both businesses and Real Estate Associations have in the last few years continuously petitioned for help from authorities in Ho Chi Minh City. They have even requested for help from the Central Government, asking them to consider and remove the many obstacles in building project procedures.
One director of a business shared his experience saying that although they had completed a large project in Thu Duc City, there was delay in the finishing components of the project, hence it is difficult to complete deals with customers. He said that even though they had proposed changes to leaders in Ho Chi Minh City many times, the problems were not dealt with yet and so far, the situation continues to still remain the same.
Mr. Nguyen Van Hau, CEO of Asian Holdings, said that the legal completion time for a housing project in Ho Chi Minh City takes an average of nearly five years provided the conditions are favorable, otherwise the time for completion is much longer. Earlier, Asian Holdings company implemented a project in Binh Chanh district and from the time the investor received approval, it took more than four years to complete all the legal procedures.
Delays such as this cause losses for companies because if each year there is a loss of 10% on the loan interest, it takes about four years for the company to pay back that interest. Besides this loss, there is the problem of stagnancy with no cash flow while the project is still on hold, making it even more difficult for real estate businesses to continue with the project.
Many businesses involved in housing projects in Ho Chi Minh City say that they want to increase supply, but they are facing so many difficulties with completing legal procedures. This situation has caused the supply of housing projects to decrease significantly in the last four years, even in the affordable housing segment that has almost disappeared.
Mr. Huynh Thanh Khiet, Deputy Director of the Ho Chi Minh City Department of Construction, had a discussion on the prevailing situation with members of the construction industry and admitted that according to current regulations, no housing project can complete the paperwork in less than two years, with some projects even facing a five-year delay. The reason is that the process and procedures have not been adjusted to changes of new laws, decrees, and circulars issued or amended after 2019.
Mr. Khiet said that from the end of 2021 until now, the Ho Chi Minh City Department of Construction has only proposed shortening the processes related to social housing, renovating old apartments, and shortening the process for commercial housing in order to improve the business investment environment in Ho Chi Minh City. However, so far there has been no visible changes in the situation.
Credit crunch
Credit for real estate projects has tightened, and home buyers are finding it exceedingly difficult to access loans. Home loans, in particular, at preferential commercial banks in the first year are at 4.99% to 8.5% per year, while from the second-year floating interest rates are to be applied, calculated for 11.5 to 12 years.
At a talk show in early June, Mr. Nguyen Minh Nhat, General Director of the Van Xuan Group, shared that the enterprise had been approved for a loan of VND 2,000 bln, but when it was time to build the project, the bank stopped lending because of lack of credit room, causing the business to face a serious lack of capital to develop the project.
Many other banks have also returned loan documents or have notified businesses against providing loans due to lack of credit room. At the end of March, Sacombank directed branches and transaction points in credit growth control that it would not grant credit to the real estate sector until the end of June, except to officials, employees, and buyers for daily living purpose.
It is seen that real estate businesses rely too much on the banking system, which is perhaps the reason why this group has fallen into the current precarious situation. In the recently published Report on Assessment of the Real Estate Market in the first six months of the year by the Institute of Construction Economics under the Ministry of Construction, four factors have been listed that have had a negative impact on the market, of which two are related to bank credit.
Firstly, investment capital in the real estate market from bank credit and corporate bonds is still being strictly controlled. The number of newly issued real estate corporate bonds have decreased compared to previous years. In addition, the State Bank of Vietnam is oriented to strictly control credit capital for high-risk potential sectors, in which most are in the real estate segment. Secondly, in the face of inflationary pressure and the increase in deposit interest rates of many commercial banks by the end of the second quarter, some banks have adjusted to increase lending rates. In addition, by the end of June, many banks had reached their credit limit, so customers wishing to buy houses to live in were also finding it difficult to access capital from banks.
However, the State Bank of Vietnam has affirmed that it did not direct or tighten real estate credit. The view was to strictly control credit risk in a number of potentially risky areas such as resort construction projects, speculative projects, and for price manipulation. Commercial banks have the right to decide whether to lend or not. However, the fact that the State Bank of Vietnam did not easily grant more credit room to banks has indirectly prevented commercial banks from injecting capital as strongly as before.
Decline in buying power
According to DKRA Vietnam Joint Stock Company (DKRA), in the first six months of the year, although the real estate market recovered in almost all segments compared to before the Covid-19 pandemic, there were still many difficulties and challenges, including inflation, political instability in major countries around the world, scarcity of new supply, and tightening of real estate credit. All these were directly affecting real estate prices, although prices are still continuing to increase.
According to Dr. Dinh The Hien, an economist, the sharp increase in land prices during the economic downturn due to the Covid-19 pandemic during years 2020 to 2021, has a number of reasons. The objective reasons include that some regions have infrastructure deployed by the State; the source of compensation for the Long Thanh airport project spreads to the surrounding areas;and capital from commercial banks with relatively low-interest rates was poured into the market.
The subjective reasons are that due to psychological factors, that is to say, investors believing that land prices will continue to increase as in previous years; and fear that the currency will depreciate due to rising inflation, so people shifted investment in real estate. Particularly in Ho Chi Minh City, a number of areas saw a sharp increase in prices due to the scarcity of new supply due to the lengthy inspections and examinations of a series of projects and the lengthy legal processes and procedures for licensing of projects.
According to Mr. Tran Hieu, Deputy General Director of DKRA Vietnam Company, the purchasing power of real estate projects is decreasing significantly. The reason is that buyers cannot borrow money from banks as most of the banks have tightened real estate loans for these projects. The sales staff of a real estate company in Ho Chi Minh City that has an ongoing project in Hung Yen, shared that after news spread of tightening of credit for real estate projects, many customers changed their minds about buying because they knew they could not buy a house in this project if they could not receive any loan from the bank. In this situation, customers are turning away, and showing no intention of investing at such a time.
According to a survey done by Saigon Investment of some projects in Binh Thuan, Nha Trang, and Phu Quoc, the latter considered a "golden" land for long, purchasing power has dropped to a very low level in the last several months. The director of a real estate company in Ho Chi Minh City who is marketing a resort real estate project in Phan Thiet, reflected on the rather gloomy situation, with the supply in great abundance but with a dwindling purchasing power that is now almost nonexistent. Even customers with idle money who do not have to borrow from banks, are being cautious at this time therefore the current market is becoming more and more stagnant.
Consequences to economy
From 1 October, the ratio of short-term capital for medium and long-term loans of banks will decrease to 34%, which is also one of the factors holding up real estate credit and making it difficult to open the doors for real estate lending like before. In a survey on business trends of credit institutions conducted by the Department of Forecasting and Statistics (SBV), credit institutions said that they expected to ease the tightening of lending, investment, tourism, securities sectors, finance, banking, and insurance in the last six months of the year. In the real estate sector, credit standards are expected to remain the same or maybe tighten, except for loans to buy residential real estate for individual customers.
According to Dr. Tran Du Lich, an economist, the financial and real estate markets are two sides of the same coin. Both finance and real estate markets can develop well, but when there is a crisis situation it causes a far-reaching ripple effect. The real estate market makes a great contribution directly and indirectly to the economy, hence if it becomes stagnant it affects the whole economy. Dr. Lich compares real estate enterprises to bicycles that have to run but if they stop, they can topple. Real estate businesses run on capital flow of banks, buyer investments, and corporate bonds. If these sources dry up the momentum stops. Therefore, the management agency must handle and control the situation before it causes more damage because of far-reaching consequences on the whole economy.
