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Housing finance

Vietnam’s depressed property market has led to calls for government intervention in credit markets to help overextended property developers and to stimulate demand for housing.

Lessons from international experience suggest that there is scope for government action to improve the operation of the housing market. However, policies should not be a reaction to short-term events, but should help increase the supply of financing as a contribution to the long-term challenge of building safe and modern houses for a prosperous, upper middle-income country.

As countries develop, people move from the countryside to the city in search of better-paid, more stable jobs, and to take advantage of other amenities available in urban and suburban areas. Millions of new homes need to be built in a short period of time to meet rising demand for owner-occupied and rented accommodation. How the domestic financial system mobilizes capital to build these structures, and to finance their purchase by prospective homeowners, has huge implications for the well-being of households and the growth of the national economy.

Informal housing development has been surprisingly successful since the start of the Doi Moi period in Vietnam. By informal housing we mean dwellings constructed by individuals outside of government development land use plans and sometimes outside of the official land administration system. Housing ownership is among the top ten in the world. The slum rate in 2020 was just 5.8 percent, ranked 11 of 102 countries with GDP per capita below US$20,000 according to the World Bank. The slum rate is lower than neighboring countries with higher levels of average income, including Thailand (6.8 percent), Indonesia (19.4 percent), and the Philippines (36.6 percent).

However, reliance on informal housing development also gives rise to several serious problems. These include low housing quality, lack of security of tenure and inability to use land and dwellings as collateral, which has meant that construction and acquisition have been financed largely through informal credit systems. Moreover, high construction area to land ratio causes insufficiency of land for roads and other public facilities such as parks and playgrounds. A persistent imbalance between supply and demand has encouraged speculation in land and houses, resulting in excessive risk taking and large and destabilizing price fluctuations.

Homes and other buildings usually comprise the largest investment category in both advanced and developing countries. In Indonesia, for example, houses and other buildings accounted for three-fourths of domestic investment in 2021. The property market accounts for a smaller share of domestic investment in countries like Korea and Japan that rely less on natural resource exploitation, but even in these places homes and other buildings make up nearly half of total domestic investment. Data for Vietnam are not available, but it should be significant as around 100 million square meters of housing have been built annually in recent years.

Because of the weight of the property sector in domestic investment, changes in property prices have a massive impact on the macroeconomy. A fall in demand for housing generally leads to a recession and can even result in a financial crisis. The Global Financial Crisis of 2008 was caused by overborrowing and overlending in the U.S. housing market, which left banks in North America and Europe heavily exposed to risky assets generated by an underregulated housing finance system. Overborrowing in Spain’s property bubble burst at the same time, bankrupting half of the country’s property developers and saddling domestic and European banks with billions of euros in non-performing loans. China has been facing a similar situation as it was estimated that 38 percent of the developers have been insolvent or to be insolvent soon.

In Vietnam, the VND1.8 quadtrilion of the individual loans for housing by commercial banks, equivalent to 19 percent of GDP  is large. The potential risk is high as these long-term loans have been mainly financed by short-term savings.

Periods of euphoria create property price bubbles that are risky for developers, homeowners and banks. Equally, a weak property market is a drag on investment and has a negative impact on other sectors that are linked to construction, for example cement and steel, electrical goods, furniture and services like banking, insurance, communications and transportation.

For a rapidly growing economy like Vietnam, the main objective of government policy should be to achieve steady growth in the supply of modern, safe houses along with adequacy of supporting infrastructure and services such as roads, parks, playgrounds and sanitation. To achieve this goal, a consistent set of policies is needed covering access to land, access to finance, public investment, planning and construction standards. The policy will not be successful if any one of these five elements is missing. For example, if financing is available, but the supply of land in urban and suburban areas is limited, prices are likely to fluctuate, causing instability in the sector. If construction standards are not enforced, the value of new houses will depreciate quickly, draining capital from banks, homeowners and local government.

Housing finance
Space does not permit a discussion of all five elements. With respect to finance, government should act to increase the supply of stable, long-term financing to the property sector, including developers and homebuyers. Historically, countries have relied on specialized institutions such as savings and loan associations, mortgage bond banks and state mortgage banks. Governments have also guaranteed property sector loans to share risk with commercial banks and other lenders, and they have purchased existing mortgages from banks to increase funding for new loans.

These policies have two aims. The first is to ensure that capital markets are sufficiently liquid, meaning that investors can readily convert their assets into cash. Active secondary markets for loans and bonds increase liquidity, but take time to develop, especially when doubts are raised about the corporate transparency. To substitute for secondary markets, the government can help create markets for property sector loans and bonds, a strategy that has been pursued in most of the now advanced economies.

The second aim of housing finance policy is to manage risk, mostly by regulating leverage for mortgage and property development loans. Property markets naturally tend toward exuberance and overborrowing when prices are rising and collapse when prices fall. Vietnam experienced this cycle in 2008 when asset price inflation forced the State Bank of Vietnam to restrict credit, leading to a prolonged property market depression and the insolvency of small banks. The regulator needs to keep a careful watch on both property developers and homebuyers to make sure that their loans are collateralized even in a weak market.  However, policies should be considered and implemented carefully to avoid panic and shocks as it has happened in many places and China is the most recent case.

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