The Austrian theory explains that the fall of the interest rate due to expansionist monetary policy encourages investors to make investments whose yields would be too low or whose risks would be too high to start under normal conditions. Those investments do not reflect the breakdown desired by individuals between savings and consumption, which introduces considerable distortions in the economy. This explains why people were overinvested in real estate with regard to what was sustainable in the long term. When the distortions became too great, the crisis broke out. Of course, other factors played a role in the financial crisis, but no one factor could have existed or at least been generated without the considerable and irresponsible monetary and credit expansion policy led by the central banks, in particular in the USA, in Europe, and in Great Britain—Pascal Salin
Vietnam’s Imploding Property Bubble
A classic case of inflationary boom morphing into bust: Forged by easy money, Vietnam's debt-fueled property bubbles have come under severe pressure, which has begun to spill over to its economy.
I. "Too Much Debt": Vietnam’s Property Bubble Deflates!
Domestic media seems to have barely covered Vietnam's imploding property bubble.
EdgeMalaysia/Bloomberg June 1, 2023: Vietnam builders have suspended more than 1,200 real estate projects worth 800 trillion dong (RM160 billion) as funding woes continue to beset the industry. “A huge resource has been frozen and we don’t know how long it would last,” the Vietnam Real Estate Association said. “These halted projects are not creating added value for society but leading to multiple consequences.” The property crisis — triggered by builders taking in too much debt, the Covid-19 pandemic that damped demand and a government crackdown on corruption — has affected more than 1,800 builders and forced 340 other companies into insolvency in the first quarter of the year, according to the construction ministry.
Please take note of the phrase: "too much debt."
The property sector's boom-bust cycle as described by this chronicle:
Vietnam Briefing, March 23, 2023: In the decade or so to 2019, Vietnam’s real estate market experienced rapid growth. Buildings could not go up fast enough as the middle class rode a wave of economic development out of the countryside and into apartments in the cities. Accommodating all these new home buyers, however, took vast sums of capital. Real estate firms were borrowing from banks hand over fist and issuing hundreds of thousands of millions of dollars’ worth of bonds to satisfy the surging demand. But then COVID-19 happened, and Vietnam’s home buyers changed from bulls to bears. This led to a downturn in home sales and a number of real estate companies, that were overleveraged to begin with, found themselves short of cash and unable to borrow more.
Figure 1
The official "refinancing" rates of the State Bank of Vietnam (SVB) have been declining since 2012. (Figure 1, topmost chart)
That is, SVB's easy money regime was responsible for the real estate bubble via the accommodation of the borrowing binge, which led to overinvestments in the sector.
Here is the thing.
Vietnam hardly had an inflation crisis, based on its reported CPI. And so, in joining its peers, the SVB raised its policy rates by only 200 bps. (Figure 1, middle pane)
The debt level of the property sector must have been so immense for a 200 bps increase to have "pricked" the bubble.
Of course, as suggested by the anecdote, the rate hikes only intensified the extant or pre-existing slump.
This formative crisis, which has weighed on its CPI, has likely prompted the SVB to start with its rate cuts! It chopped 50 bps last May.
The recent surge in Vietnam's 10-year bond yields seems to exhibit credit concerns than inflation risks. (Figure 1, lowest chart)
The SVB should have consulted the Philippine BSP on extending relief measures to the banks. Such programs would have indirectly extended liquidity facilitation to the property industry, which would have deferred this predicament (Kick the proverbial can down the road).
II. Charles Kindleberger’s "Sauve Qui Peut" in Action!
How about the role of corruption in the bursting of the bubble?
In a Kindleberger fashion, corporate misdemeanors have accompanied the developing liquidity drought.
Vietnam Briefing, March 23, 2023: But it was in March of 2022, as global economies were adjusting to their new war-footing, that cracks started to appear in Vietnam’s real estate market connected to allegations of underhanded and shady dealings. This culminated with the arrest of Trinh Van Quyet, chairman of real estate developer FLC. The allegations against Quyet centered around stock market manipulation whereby he offloaded 74.8 million shares of the company he founded without notifying the State Securities Commission. This set alarm bells ringing.
Corporate misdeclarations, misrepresentations, and stock market manipulations, does this not ring a bell?
And another…
Vietnam Briefing, March 23, 2023: For much of 2022, the crackdown on malfeasance in the real estate sector had continued with the occasional arrest or two making a small ripple in the local press. But when Truong My Lan, the chairwoman of real estate firm Van Thinh Phat Holdings Group, was arrested in October of 2022, that began to change. Lan was alleged to have committed bond fraud to the tune of tens of millions of dollars but it was not her arrest necessarily that made national headlines. Instead, rumors surfaced that Van Thinh Phat Holdings Group was connected to Saigon Commercial Bank. This led to a bank run that saw the real estate sector’s troubles, and those of the bond market, take center stage once again in public discourse.
The alleged "fraud" wasn't the cause of their financial troubles; it was a symptom that merely exposed the sector's underbelly through the banking system.
Banks had heavy exposure to the sector. This rendered them vulnerable to a loss in the public's confidence, which the episodes of corporate misconduct revealed.
"Sauve qui peut" (may he who can, save himself) in action!
III. The Bursting Property Bubble’s Spill Over Effects on Vietnam’s Economy
Lastly, the spillover to the economy…
High economic growth rates have distinguished Vietnam's reputation in Southeast Asia.
But perhaps the corroding effects of the ongoing property crisis have started to weigh on its economy.
First, despite the booming loans, the real estate share of the national GDP has been falling.
This excerpt, from an article in 2020, described Vietnam's real estate industry.
Vietnamnet.vn, July 7, 2020: In view of the added value of real estate in the GDP, figures 1 and 2 show the share of added value of real estate in the GDP has tended to decline, falling from 6.7% in 2005 to 4.6% in 2018. The gradual decline of the added value of real estate in the GDP is due to the lower growth of the sector versus the overall growth of the economy, meaning that other sectors in the economy have very high growth...
Figure 2
According to Statista estimates, the property sector's share of national GDP has dropped to 3.61% in 2021 from 4.51% in 2015. (Figure 2, upper chart)
Again, this comes as private sector credit (relative to the GDP) flourished from 2015 to 2022. (Figure 2, lower diagram)
Sounds familiar?
Further, despite a minuscule share, the property slump appears to be spreading.
Vietstock, June 3, 2023: Minister of Planning and Investment Nguyen Chi Dung, speaking at a meeting of the National Assembly on June 1 to discuss the current socioeconomic situation, said a recent report from the ministry (MPI) on business registration suggested that the real estate business continues to be the most adversely affected sector. Minister Dung said, "Around 143,000 enterprises from all industries withdrew from the market last year, an increase of 19.5 per cent on-year. Some sectors saw a higher percentage than others, with real estate companies representing a 42 per cent jump and finance, banking and insurance witnessing a 35 per cent increase in withdrawals." Other economic sectors to experience an increase in companies deregistering were education and training, with a 31 per cent rise, IT and telecoms up 28.5 per cent, and construction saw a jump of 18.8 per cent.
It shouldn't be a surprise that the impact of the deflating property bubble has spread first into the financial sphere and, as its subsequent order, the broader economy.
Figure 3
Vietnam's GDP fell to 3.32% in Q1 2023, below the 5% floor threshold rate during the pre-pandemic era. (Figure 3, upper chart) As a caveat, our abridged explanation of their GDP has been due to time and data constraints.
Further, it isn't a surprise the bursting bubble has started to slow Vietnam's housing prices (+1.94 Q1 2023), which again would have spillover effects on the economy.
That housing prices are still increasing despite the asset liquidation-prone scenario is something statistics can conjure!
In any case, the risk of contagion from Vietnam's bursting property bubble could foreshadow events in Asia.
One thing is certain: inflationary booms eventually go bust.
