Will the Real Estate bubble in Vietnam burst next year??

In 2012,will  the bubble of Vietnam real estate be burst?

An expert of Real Estate Thailand forecasts that end of 2012 is the time that bubble of real estate in Vietnam will burst and he is waiting for that moment to come to VN and buy the real estate at the cheap price.

However, there are some intangible factors that prevent this bubble from bursting or deflating.

Why is there a property bubble?

 By definition, “asset bubble” occurs when the market price of an asset is pushed too far above the true and normal value of this property.

This article only discusses about the housing segment of the property market in Vietnam and trying to understand if at present we can use the word “bubble” to describe the situation, and if so, when this bubble will ever break and how the consequences will affect the macro economy.

Firstly, the elements to form the market value of real estate including quantifiable factors: (1) supply and demand of the market (2) purchasing power of consumers (3) cash flow is pouring into real estate channel (4) Macroeconomic situation; and (5) intangible factors that cannot be measured accurately, including (a) the impact of speculators (b) movement of crowd psychology (c) government policies and (d) the thinking and feelings of everyone involved.

In the quantitative factors, most important is the law of supply and demand of the market. Segment (senior or middle or low-income world, commercial or office, real estate tourism, industrial …) we can also calculate the number of supply and demand of consumers.

Currently, in Vietnam, based on reports of retail specialist , inside and outside the country, the luxury house has a supply of about 1 / 3 larger than the demand and the total number of housing secondary speculation is about 47% of sales. Meanwhile, the number of demand in the other segment is relatively higher than supply, especially low-income housing segment.

The second factor is the affordability of consumers. According to European and American markets, they calculate 25% of the income of the buyer is ability to pay debts when compared to the loan amount paid monthly to the bank (plus taxes and insurance). For example in Vietnam, the average income of a married couple working together is 12 million per month, if you use a ratio of 35% ( higher than abroad) for the repayment (4.2 million), then they can borrow a maximum amount of 400 million paid to 20 years at an interest rate of 15% a year. VN people have more savings, so the amount of cash paid (down payment) can be up to 1 / 3.

Based on these factors, the average price of a house is around 600 million VND and it’s suitable for their circumstances. And according to this formula, the majority of houses in HCMC or Hanoi are beyond the capability of consumers.

Other factors can be measured as cash flow is pouring into real estate, including the idle money of investors, money borrowed from banks or private, and investment money from abroad through FDI. Currently, FDI is still pouring into real estate projects have very low cost of land requisition and has many preferential investment conditions. However, very little money for FDI projects that are unfinished, stranded capital, but investors don’t go more than 30% lower initial cost.

Local banking system is accidentally stuck with a lot of bad loans; so it must continue to mature real estate investors, hoping the market recovery. NPL ratio of banks’ real estate loans were not disclosed, as well as the target line and other international bad debt, so can only be estimated. According to one of Singapore’s financial experts, the average number of NPLs to 18% of total debt, a very high figure.

Idle money from private is quite abundant, but since the real estate market in HCM City’s froze, investors start to move money through other channels of investment. Currently, the government is preventing this flow of money into gold or dollars channels and make sure that there will be a little drop in real estate, but will be limited due to confusion of psychology.

The 4^th quantitative factor is the influence of the macro situation, that main action will be the growth of national income (national income, not GDP), VND exchange rate and inflation figures. National income includes the balance of exports over imports, FDI, remittances and private and public debt. All these elements are negative, tend to go down and will adversely affect the real value of real estate in a normal market.

Therefore, if only looking at five factors above, we can say that house prices are higher from 10% for houses in the provinces outside the City and Hanoi, and 20% for average and up to 40% for the luxury house.

If the economy of Viet Nam is same as the one in Europe and America, all of finance concepts will be forecasted as the bubble that could be bloomed at any time. However Vietnamese Economy has a lot of unreasonable things that could not be explained.

Two of the most important factors of real estate in Viet Nam are the strong affect of spectaculars, effective support of project investors, as well as unexpected sponsor of banks and gathering trend of and people. The information of real estate in Viet Nam is lack of clearness and accurateness, the law of real estate is complicated and difficult to implement, so spectaculars use these law holes to proceed the unlawful tricks from advertising or making wrong news until creating unreal price.

We could see the affects of spectaculars through increasing price in Ha Noi and HCMC. The strength of spectaculars lets us see affecting pushing as for the market price.

The spectaculars in Vietnam show the gathering trend very highly.  Because the tradition of family, friend, and social team, spectaculars do not have independent guess or find out characteristic opportunity.  The point of “I am the same as everyone” makes the market moveable, unequal and create ball signal. On another side, this factor can affect to price if spectacular is lack of money and sell quickly.  To be scared when someone shouts “fire” in the cinema is an example.

Two other factors affect price of real estate is the policy of government and thinking of buyers and sellers.  The law of VNmese real estate use normal formulas to guess these affects in the market price. However we can be sure of some things: the government does not want the ball bloomed because of the dangerous result as for the bank debt. In addition, the policy of government brings opposite result compared with the beginning goals, so the new administration procedure will make every business exchange slow and keep the price higher.

With the decision of avoiding ball bloomed, the government can invest a large of money in real estate, directly or by bank, and the last result is the step of going down will go slow in many years. Moreover, if the number of inflate is high, money is serious lack of value, the money of private business will be invested in real estate to keep safeness of free money.

Another factor is real estate has personal feeling because of the feeling of seller or buyer. Among of properties, real estate often goes with hateness and loveliness and affect the decision of relating people. One town could be loved with old memories can make the price increase 15%  till 40% compared with the real price, the art structure can create strange feeling or loving feeling, depending on personal  thinking.

Generally, it is difficult to measure the unreasonable thing of real estate and this factor can help real estate market stainable.

Any bubble will burst.

Overall, currently four invisible factors are the barriers preventing the collapse of bubbles in Hanoi and HCM City. Although real estate in Ho Chi Minh City is frozen, prices haven’t returned to the true and reasonable value as recognized by quantitative factors. However, in the long run, all bubbles have to burst so that the market price can be back to reality. The problem is how long can the intangible factors keep prices and liquidity?
Through experience of the European and American countries, the bubble is considered broken as the market price breaks down below 30%. Because of panic psychology, market prices may be down 20% below real and normal prices. Therefore, depending on the price that bubble has been established, luxury house prices in Hanoi today can lose up to 60% of the market price if the bubble explodes. With this frozen situation, luxury houses in HCMC city could lose about 40%. The others residential segment will also lose value, but less.
In writer’s opinion, the housing market in Hanoi will be frozen in 2012 as HCM, and it can take four more years before the real estate bubble burst in Vietnam and prices return to normal levels around 8 years later. However, any great psychological impact on the market that (a great debt deceit runs a collapse of a bank or a group…) can be a factor to push it happens earlier.

I think that the Thailand expert has mistaken the bubble real estate in VN with the movie 2012.Let’s wait and see.

Năm 2012, “bong bóng” BĐS Việt Nam sẽ vỡ?

http://land.cafef.vn/20110506035422278CA43/nam-2012-bong-bong-bds-viet-nam-se-vo.chn