To save or not to save the real estate market?

A rendering of a real estate project currently under development in Vinh City.

For many years, and even up to the present day, the topic of real estate remains a frequently discussed subject. However, the approach to the issue differs between periods of price surges and market freezes.

Currently, there are cries for help and pleas for bailout from real estate companies everywhere, but if we go back a year, the story is completely different. At that time, real estate companies of all sizes were announcing huge profits in their Q4 and full-year 2021 financial reports. Headlines such as "real estate companies achieve record profits," "real estate companies exceed profit targets," "real estate businesses profit despite the Covid-19 pandemic"... flooded the press and media.

The skyrocketing land prices have helped many people get rich quickly, reaping profits in less than a year that are many times greater than the money they saved from their salaried jobs or bank accounts.

My friend – the director of a real estate brokerage company – told me in early 2022 with exasperation: Land prices were skyrocketing and rising inexplicably. Even plots of land with no infrastructure advantages and unsuitable for production or business were still being offered at exorbitant prices.

Of course, what had to happen eventually did: risky asset markets gradually stalled and declined. There are many explanations for this market reversal, but everyone must accept the reality that no bubble lasts forever, and no market can rise indefinitely. If land prices kept rising, who would still be able to do business in the real estate sector? If speculating on land and trading stocks were always easy, with guaranteed profits, and the whole society rushed to buy and sell land and stocks to make a profit, who would focus on production, who would work to create added value for the economy?

The urban landscape of Vinh to the south is becoming increasingly developed, leading to a dramatic increase in real estate prices in the surrounding areas in recent times. (Photo: Lam Tung)

In 2022, besides addressing irregularities in bond issuance at some real estate companies, both the land market and the stock market slowed down. The hotheads gradually calmed down to conduct a more comprehensive assessment of the market and identify external risks. Furthermore, after the Covid-19 pandemic, businesses focused their resources on production and business operations, restoring import and export activities. The era of "cheap" and "easy" money came to an end!

The difficulties arising from the disruption of global supply chains due to the Russia-Ukraine conflict are becoming increasingly apparent. Interest rates are rising daily due to the trend of central banks around the world raising interest rates to combat inflation. In 2022, there were at least 300 interest rate hikes by central banks globally, almost three times more than in the same period of 2021.

The State Bank of Vietnam (SBV) is, of course, also following this trend. Within a month, the SBV raised interest rates twice (the first time on September 23, 2022, and the second time on October 25, 2022), with a total increase of 2% in the policy interest rate.

With high interest rates, all businesses, not just the real estate sector, are struggling to access capital.

At a recent real estate credit conference held on February 8th, real estate businesses stated that their current difficulties mainly stem from a lack of support from banks, with issues of collateral, interest rates, and credit limits being the top obstacles.

However, Deputy Governor Dao Minh Tu affirmed that the State Bank of Vietnam has not issued any document or statement requiring strict control of credit to the real estate sector. At the same time, real estate credit growth in 2022 was higher than the overall economic credit growth (14.7%). For many years, the proportion of real estate loans has always been the highest in the economy, accounting for 19% to 21%. Outstanding credit in the real estate sector at the end of 2022 was VND 2.58 trillion, an increase of approximately 24% compared to 2021, the highest level in the past five years.

Therefore, saying that banks haven't shown interest in supporting the real estate sector is unfair!

Many proposals have been put forward by businesses, such as expanding credit limits, allowing businesses to restructure debts, or requesting debt deferrals... However, no clear solution has yet been found, other than banks stating they will reduce interest rates.

Regarding this issue, some argue that it is unfair for real estate businesses to profit handsomely during the boom period and then demand bailouts when things get tough, as this is detrimental to both banks and businesses in other sectors of society. In business, one must accept the "profit and loss" cycle; one cannot enjoy profits while complaining about losses!

Ultimately, the market is governed by the law of ups and downs, periods of prosperity and periods of decline. The government is not responsible for rescuing or favoring any particular business or sector, but it needs to implement skillful solutions to avoid shocks, minimize damage to the economy, and harmonize common interests.

Vinh City is bustling and attracting a wave of real estate investment. Photo: Provided.

Raising capital doesn't solely depend on bank credit. The problem is that a segment of businesses are facing financial difficulties due to the pressure of bond debt maturing since 2023. In 2023, the real estate sector had approximately VND 282,160 billion in corporate bond debt maturing, and VND 362,900 billion maturing in 2024. This doesn't even include investors demanding early withdrawals due to psychological factors. At this point, business owners are naturally the first to bear responsibility for these loans. However, if not handled carefully, this "debt bomb" in the real estate sector could negatively impact the entire economy.

Lowering interest rates is necessary because borrowing rates of 14-15% per year are unsustainable for most businesses, including manufacturing companies. The use of credit "room" is still maintained by the authorities; however, careful consideration is needed to ensure timely capital supply to the economy. Capital should be directed towards businesses with sound projects, sound finances, and those meeting the real housing needs of the people.

Businesses themselves cannot simply rely on policy. Proposing a separate bailout mechanism will face many obstacles and controversies. Each business needs to proactively negotiate with creditors and bondholders to restructure debt repayment schedules, consider the possibility of selling off assets, and aim to lower product prices to sell them…

It can be said that this is a "painful" period for the real estate industry and investors, but it is entirely within the laws of the market, leaving many lessons about capital management from micro to macro levels, and about state management. Addressing the bottleneck in access to capital for real estate is a short-term, situational solution; fundamentally, policies must be reviewed to curb the "get rich quick" mentality from land. Ultimately, economic growth must be based on the production and business of goods and services, not on a purely land-based economy focused on buying and selling land for profit.