Bubble, boom or bust for Hanoi’s property market

Housing prices in Hanoi did not skyrocket overnight. How did Vietnam get to this point and how will it end?

By Chloe Ter

Six years ago, the property bubble in Vietnam had burst. With governmental efforts to clear up the real estate bad debts and attract homebuyers, the residential property market has proliferated. In the first five months of 2017, investment in the real estate market increased by 43.8% year-on-year. Undoubtedly, a bubble exists. The uncertainty left today is whether Hanoi is enjoying a booming growth or the market has become an overinflated bubble waiting to implode.

The Vietnam Property Price Expectation Index has increased to 85 points in early 2017 from under 50 points in early 2013. CBRE Vietnam, the largest commercial real estate services and investment firm in the world, reported that the housing prices in Hanoi are growing fast. In 2017, High-end and luxury condominiums experienced the highest increase of 8.4% and 12.3% respectively. Prices of landed property in core urban districts also increased, ranging from 1.4% to 7%. Jones Lang LaSalle, a leading professional services firm that specialises in real estate and investment management, also predicts a continued property price hike in Hanoi.

Source: CBRE

Foreign investors are making a beeline for Vietnam’s property market

Vietnam’s Real Estate Market has been underperforming since 2008. In 2015, the government introduced the Housing Law and Law on Real Estate business to boost market activities. This change in regulation permits foreigners and overseas Vietnamese to legally own, sell and lease a maximum of 30% of the apartments in a condominium or up to 250 houses in a designated area.

By easing housing restrictions, more foreigners can own properties for personal and side income purposes. The number of foreigners working in Vietnam has increased significantly over the last ten years, from 12,600 in 2004 to 83,500 in 2015, as reported by the Ministry of Labor, Invalids and Social Affairs. If every foreigner working in Hanoi wants to buy a flat, they will exhaust the year’s supply of newly constructed prime units. Tourists who decide to invest in a property could further aggravate this possible shortage of flats.

Dang Hung Vo, a real estate expert, said at a workshop that the property market in Vietnam was still witnessing unbalanced development, with developers focusing on high-end housing rather than affordably priced apartments. He estimated that between 2016 and 2018, the market would receive nearly 80,000 housing units, 70% of which would be in the luxury segment.

Such unbalanced growth may be beneficial to foreign investors who wish to see their property value grow.  But, this is certainly not the case for locals and lower income groups who may find certain housing choices increasingly unaffordable.

Uncontrolled growth of the property bubble

To spur economic growth, Vietnam has taken on a loose monetary policy approach and provided its citizens with greater money supply. On May 20, the State Bank of Vietnam reported that money supply had increased significantly, from 2.2% last year to 5.9% this year. By increasing liquidity in commercial banks, Vietnam may be able to better prepare for the future spike in credit demand.

National Financial Supervisory Commission (NFSC) estimates the credit growth rate in August 2017 to be around 11.5%. This figure was 1.3% higher than in 2016. Additionally, short-term loans rose by 14.1%, while long-term lending grew by 8.8%. This trend bears a resemblance to the makings of United States’ 2008 sub-prime mortgage crisis.

Source: National Financial Supervisory Commission (NFSC)

High construction expenses drive up the cost of housing

With figures provided by Dang Duc Thanh, member of the VCCI Executive Committee, real estate developers are required to pay land use fees where they will inevitably pass on these costs to consumers. In addition, each licensing project takes around three to five years. During this timespan, developers will incur more administrative overheads. They will then raise selling prices to cover their costs and ensure profitability.

In Hanoi, the cost of turning one square meter of agricultural land into urban land is VND14-16 million (US$620-700).  Real-estate firms have to sell it at VND20 million (US$880) or more to earn a profit. With possible under table dealings and unforeseen expenses, they end up selling it at VND35-40 million (US$1540-1760), which is more than twice of their original cost. Also, poor transport infrastructure and services in the suburbs are justifications for the price differences between urban and suburban land prices.

Source: VietnamNewsToday

Deputy Minister of Construction Nguyen Tran Nam previously said, “The real estate price in Hanoi is unreasonably high. Vietnam is the country whose income ranks 120th in the world, while its real estate price ranks 20th.” On average, Hanoians earn 41.3% less than the Saigonese. Hanoi also has a lower population density than Ho Chi Minh City (HCMC). However, the apartment prices (per square meter) in Hanoi are three times higher than HCMC. Land prices too, are two to ten times more expensive in Hanoi, depending on their location.

Is it going to be a real estate bubble or boom?

“Although the property market is on a stable trend and contributed significantly to the country’s economic development after a protracted period, close watch must be placed on the market development,” said Vietnam’s Deputy Prime Minister Trinh Dinh Dung.

While everyone has their views on whether Vietnam is on the cusp of a property boom or a bust, it is crucial that local authorities step up and monitor the market closely. Unchecked speculations and frenzied purchases of properties will result in overvaluation and unhealthy market development.

If this housing bubble bursts, Vietnam’s past developmental efforts will go to waste. The real estate market contributes to 10% of Vietnam’s gross domestic product. Hanoi’s current mismatch in supply and demand will be a stumbling block in the nation’s progress.