Spectrum of opinion on credit moves

High-end properties are historically the first to suffer from any major jolts in market changes. (Photo: Le Toan)

According to the State Bank of Vietnam (SBV), a new legal document aims to limit loans for the high-end real estate segment to ensure the sustainable development of the market and safety of the banking ­sector.

In a statement, the bank said, “The SBV will continue to control all loans for individuals especially in the high-end segment of accommodation.”

The draft circular, however, has caused a shock to the whole market. It sets limits and a safety ratio for bank operations to apply a credit risk ratio of 150 per cent as from January 1, 2020 for any home purchasing loan worth more than VND3 billion ($130,430), three times higher than the current ratio of 50 per cent.

According to many experts, that increase of credit tightening for homes could undermine the real estate market. Banking expert Nguyen Tri Hieu said that this limit would have a very big impact on the market.

“If this draft circular is put into force, homebuyers will have to ­burden a very high interest from banks for their loans. This can have negative impacts on borrowers and it also decreases the liquidity of the ­entire market,” said Hieu.

“Loans for buying homes now are mostly for the mid- and long-term, from five to 15 years. At some banks. the period can be as long as 20 years,” Hieu continued.

“Therefore this credit squeezing will force bankers to ­increase long-term credit to re­structure their capital resources. In fact, to minimise their risk, lenders will mostly have short-term credit at the banks. And, in a circular fashion, to attract long-term loans, banks will have to increase their saving interest and the loan interest therefore also must be increased.”

Considering the long-term

According to Nguyen Van Dinh, vice chairman of the Vietnam Association for Realtors, tightened credit in any segment would also impact the investment and transactions of the market.

“If this is long-lasting, it will impact the high-end segment at a time when Vietnam is on its way to making the infrastructure system more complete in both modern urban and residential areas,” Dinh said. “Therefore, the tightening for the high-end segment should be in the short-term only, in an aim to avoid negative impacts on the market, especially in cities like Hanoi and Ho Chi Minh City.”

A real estate developer who declined to be named told VIR that, with high-end apartment units starting from VND3 billion ($130,430) and villas being priced from VND7 billion ($304,350), the majority of buyers are using loans from banks, especially investors who buy the property and then re-sell it for profit or set up for lease.

This developer said that instead of limiting credit for buyers, banks should review all current loans for developers and wipe out discredit and incapable ones to avoid incoming credit risks.

Former Deputy Minister of Construction Nguyen Tran Nam agreed that credit limitation should not be applied at this moment. “The limit for loans worth more than VND3 billion ($130,430) is not reasonable, because only wealthy people can afford them and people should not be limited because they are incapable in paying loans,” Nam said.

Instead of limiting credit in homes, Nam said, the SBV should limit loans on land purchasing, since in most cases people are buying land plots and keep it for price hikes. Therefore, they bear much risk if their land cannot be sold and they would not be able to pay loans to the banks.

The solution to market control

Despite facing opposition on the draft’s details, banking experts also said that under the view of controlling the market, credit tightening is a must-need solution.

According to economist Vo Tri Thanh, if the limit is put into force, developers may be faced with obstacles in the short-term. However, businesses could be better off over time.

“We should not soon conclude that credit tightening into real estate would make only a negative impact yet. We must have close control on the market to avoid bubbling in the real estate market which will have a domino effect into the whole economy,” Thanh said. “This tightening may have temporary impacts to real estate developers but it will make the market more stable and healthy in the long-term.”

Nguyen Manh Ha, vice chairman of the Vietnam Real Estate Association, said that the credit squeeze on the high-end segment was significant because experience from previous crises in real estate shows that the high-end segment would be the most impacted. “Large units with high prices must be controlled because these are the foremost segments to be impacted when the market experience any turbulence,” Ha said.

Elsewhere, Nguyen Manh Khoi, deputy director of the Ministry of Construction’s Department for Housing and Property Market Management, said that the draft circular is expected to have positive impacts on the market, but it needs some time to prove the effects.

“The central bank’s tightening of credit for real estate will also be a chance for businesses to restructure their investment strategies and financial resources from other channels such as international partners or from issuing bonds or stakes in the security market, not to be too dependent on bankers,” Khoi said.