Real estate loans are officially on the decline, but do the numbers speak the truth?
Two major regulatory changes caused investors to cool on real estate loans.
After the property market deteriorated between 2008 and 2013, in large part due to speculative buying followed by unsuccessful investments, the government enacted several measures, including raising the assessed risk of real estate loans to decrease lending, as reported by The Vietnamese Investment Review.
In early 2017, the State Bank of Vietnam (SBV) tightened conditions even further by requiring banks to handle outstanding bad debts, especially those in the area of real estate. The State Bank also demanded that banks project a realistic growth of approximately 10 percent, in order to ensure sensible development in the market.
As a direct result of the stricter regulations there was a drop in real estate loans last year, according to the National Financial Supervisory Commission (NFSC), but recent information has shown that the numbers may be skewed. While lending for home loans has dwindled consumer loans have skyrocketed. How do these two types of loan classifications correspond and why is it relevant?
Real Estate Loans Hiding In Consumer Lending?
Some borrowers may be taking out consumer loans to buy their homes as well.
According to state finance regulator the National Financial Supervisory Commission (NFSC), consumer credit has typically been used to purchase home appliances or pay for home renovations and repairs. However, an unexplained shift upward in the relatively stable level of consumer debt has regulators puzzled. Purchase and repair loans made up 52.8 percent of the total consumer loans in 2017, compared to 49 percent in 2016.
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Some experts believe that this points to real estate loans being hidden within consumer loans. In reporting in June 2017 by Vietnam News, representatives from commercial banks said “they currently classify home repair loans and home purchase loans as consumer lending so that lending is not restricted.”
For the moment there is no concrete regulation against classifying home repair and home purchase loans as consumer loans but this may be the next step for the SBV.
Moody’s, a credit rating agency, wrote that “[t]he increased risk weight is credit positive for the banks, as it will help limit their appetite for lending to this high-risk sector...” Moody’s analysts also acknowledged that certain banks will have to limit their association with the real estate market.
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The turn of phrase in Moody’s report is especially pertinent now. The appetite that the banks have for real estate lending does not seem to have been tempered by the strict new regulations. But the history of the real estate market in Vietnam proves that rapid lending in this sector is filled with uncertain prospects and that a boom in high-risk lending can put not just the banks but the entire Vietnamese economy in jeopardy.
No Crash in Sight But Bad Debts May Increase
Vietnam News wrote that “[i]f lending is not controlled well, with home purchase loans not based on real demand but for speculation, the country will suffer from a real estate bubble and the economy will be unstable ...”
However, the fears may be blown out of proportion. Viet Anh Nguyen, co-founder of FINGO, a start-up company in Vietnam that helps connect consumers to the right type of loans for their needs, said this type of loan misclassification is unlikely to topple the financial system but it does pose serious risks for the consumer.
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Nguyen explained that consumer credit lending is much less regulated than mortgage-based loans because of the size of the loans. Consumer loans are capped off at VND1 billion or USD43,900. Real estate loans can go into the millions.
“The higher the loan is the more the banks are checking”, Nguyen said.
Nguyen acknowledges that there may be real estate loans that are misclassified as consumer loans but these are likely for moderately priced properties in the rural market, in the villages and for cheaper land. In HCMC and Hanoi, VND1 billion is not even 30 percent of the market, where the cheapest apartment in a new development sells for USD1,500 per m2.
According to Nguyen, a market crash is unlikely based solely on these small loans, however, they do augment the debt cycle. Since consumer borrowers may be considered less reliable, the banks charge a very high interest rate, ranging from 13 to 40 percent. In addition, Nguyen reveals, the repayment average is very short, from one to five years depending on the bank’s policies, so borrowers are hit with a high monthly payment.
The interest rate can easily turn a loan that started out at VND15 million into a loan of VND25million. Some borrowers find themselves in a situation where they can’t repay their first loan and are forced to take out a second loan to settle the debt. This can put the borrower in a precarious financial state.
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To address this FINGO runs a series of consumer education classes, in order to help potential borrowers choose the right type of loan for their income. For the time being, the risks of taking out the wrong kind of loan are a danger just to the individual rather than to the broader financial system.