Real Estate Crisis? Why the ‘High-Risk’ Label Could Cost You Thousands!

Vietnam’s real estate sector is facing significant scrutiny as concerns about its classification as a high-risk area in credit policy come to the forefront. Le Hoang Chau, the chairman of the Ho Chi Minh City Real Estate Association (HoREA), argues that this blanket risk assessment is not only improper but may also distort the market dynamics crucial for the country's economic growth.

During a recent seminar on property credit, Chau highlighted that the current approach to risk assessment has tightened financing not only for developers but also for the broader economy. This, he asserts, disrupts supply-demand relationships and weakens a key driver of growth in Vietnam. “Real estate is not a monolithic sector,” he emphasized, noting its diverse branches including industry, commerce, tourism, healthcare, and education. He specifically pointed out that industrial property has remained a stable performer, attracting investment and bolstering manufacturing growth.

Chau acknowledged that the Vietnamese authorities have valid reasons for their cautious stance, given past episodes of speculative land price surges and volatility in the corporate bond market. However, he contended that treating the entire market as uniformly risky is both inaccurate and counterproductive. “A sector with such wide-ranging impact cannot be viewed solely through a ‘risk’ lens,” he asserted.

Credit Constraints Ripple Through the Market

The implications of this high-risk classification are most evident in credit policy. The caps on real estate lending growth, aligned with overall credit ceilings and quarterly loan allocations, have led to reduced flexibility for banks. This has resulted in tighter and more fragmented capital flows, as Chau explained.

The consequences have been widespread: delays in approved loans, disrupted project cash flows, and homebuyers facing increasing challenges in accessing financial resources. This is particularly problematic in a sector that relies heavily on medium- to long-term capital, where project cycles typically span three to five years or longer. “When capital is squeezed into short-term cycles, the market doesn’t just slow but it becomes structurally distorted,” Chau analyzed.

In this environment, developers, faced with rising financing costs, are increasingly shifting focus to high-end segments with better profit margins, while affordable and social housing, despite strong underlying demand, are being sidelined. A recent project in Ho Chi Minh City offering over 1,000 social housing units received around 12,000 applications, illustrating the robust demand that is constrained by limited supply.

Nguyen Thanh Huong, the CEO of Eras Land, echoed these concerns, stating that the impact of credit conditions and interest rates has been immediate. Most homebuyers typically finance about 70% of their property value through loans, often spanning 10-20 years. When interest rates climb from preferential levels of 6-7% to between 13-14%, the repayment burden becomes significantly heavier, forcing many households to delay or abandon their purchase plans.

Huong emphasized the need for stable interest rates that align with the long-term nature of real estate, warning that sharp fluctuations directly affect both developers and homebuyers.

Reassessing Risk in Real Estate Credit

Chau further questioned whether the perceived risks in real estate credit are being overstated in some instances. He noted that property-backed loans typically involve substantial collateral buffers. For example, an asset valued at VND100 billion (approximately $3.8 million) might be appraised at VND70 billion, with loans capped at around VND49 billion. While challenges like declining liquidity and market volatility do exist, Chau argued that systemic risk may arise more from restricted capital flows than from lending practices themselves.

When credit is misallocated, it leads to stalled projects and liquidity strains for developers, affecting related sectors such as construction and potentially undermining a crucial engine of economic growth. Instead of a broad tightening or loosening of credit, Chau advocated for a more targeted approach that prioritizes financing for affordable and social housing, supports young buyers and workers, and facilitates projects with clear legal status.

Tran Si Nam, deputy director of the Ho Chi Minh City Department of Construction, echoed this sentiment. He emphasized the strong housing demand among the city’s young workforce and the necessity for more flexible credit policies to support them. A more efficient allocation of capital would incentivize developers to return to segments that meet real demand, rather than being pushed towards more lucrative high-end projects.

In summary, while real estate is not without its risks, applying a blanket risk label to the entire sector could lead to unintended consequences. “The issue is not changing the goal of risk control but understanding risk correctly to direct capital appropriately,” Chau noted, pointing to the need for a nuanced approach to the complexities of the real estate market in Vietnam.