The confidence in the market hardly increases even when investors decrease property prices and provide buyers with many great deals.

First of all, difficulties of the macro economy should be mentioned. Vietnam’s economy in particular and the global one in general continue to face recessions and crises. In 2011 and 2012, the fact that businesses made lower profits led to limited investments in the real estate market. Many people had to sell their properties to address difficulties in other businesses.

Over the last two years, many real estate projects have been delayed or stretched due to loan cuts. For projects with investment up to hundreds or billions VND, investors often faced financial obstacles because banks refused to lend to them. In the past, even when the projects were unfinished, they could still sell their properties and quickly gain super-profits. However, the situation has changed. Now even when the projects are finished, investors still have great difficulties selling their properties.

Secondly, there is a lack of information and transparency, which leads to a distorted market and “investment in movement”. Perhaps only in Vietnam can anyone become real estate investors without knowledge about the market and investment, which in turn contributes to the lack of professionalism of the market. The number of real estate companies has considerably increased; nevertheless, most of them are newly established or separated from real estate – unrelated fields such as garment and textile, petroleum and agriculture. Many Vietnamese businesses with limited resources still invest in different projects, resulting in unprofessional and inconsistent working procedures.

Thirdly, “chain effect” resulted from property speculations has created “real estate fever”, forcing property prices to rocket. Many people buy properties, then sell for a higher deal and use this amount for further investment. To illustrate price increase, we can use a specific economic problem. Indeed, this problem has many complex variables, so to make it easier to understand, let’s imagine: Suppose that there are 10,000 speculators within the market with 10,000 houses priced X. The first sell his/her house for X+1, then use this amount to buy the second’s house at X+1 for further investment with a hope to sell at a higher price of X+2. Then, it is obvious that if these others want to sell their houses, they will price them X+1. Just like that, the first sells the second which creates “chain effect” and pushes the market to a new price level with just a hit from the first buyer.

If transactions within market derive mainly from consuming demand, the price won’t be determined by “confidence” and “sense” like speculations. Similarly, when there is a lack of confidence in the market and a decrease in money flow, there will be reverse effects. The first one cannot sell his/her house at X+1, but X-1 for debt payment, and so does the others.

Fourthly, property prices, especially housing prices in big cities have been too high in comparison with people’s average income and development level of the economy. For years, property-market speculation, investment in movement and chain effect, etc. have been driving housing prices to high levels. The real estate bubble is likely to have been blown up to a maximum level and cannot be maintained anymore. Meanwhile, the macro economy continues to experience recessions with high inflation, causing housing problems for the poor with low income.

Fifthly, despite constantly increasing supply, the commodity structure of the real estate market is not balanced among segments and regions, thus hardly meet society’s demand, leading to a growing gap between supply and demand. Due to spontaneous development, many investors only focus on housing for high-income people, resulting in abundant supply for this segment. Whereas, the high demand in other segments including mid and low ones or rental housings in urban area are ignored. In addition, many projects are behind schedule, short of infrastructure connection and then abandoned, causing waste of the State’s land resources and investment.

Next, confidence in the real estate market is declining. Many people begin to realise that the property prices are too high, and expect prices to keep decreasing. Investors with financial problems, on the contrary keep selling out as many properties as possible at lower price rates with a hope to increase sales. As a result, the price is assumed to decrease more and more and few transactions are made.

Finally, the most important reason is due to governance and management with so many shortcomings in the legal system. Such inadequacies create favorable conditions for speculation, underground trading and tax evasion, which help some to easily make a lot of money out of real estate, while the majority still faces housing difficulties. Additionally, loopholes of the legal system fail to protect ordinary people when buying properties.

By Le Xuan Truong - Property report - April 1st, 2013