Tightening credit score for 2nd house consumers no longer logical right now: economist

Given the current situation of low credit growth, it would be more logical to expand credit, particularly through real estate, rather than tightening it, says economist Le Xuan Nghia.

Nghia points to China’s experience with this move. Tightening credit and taxing second homes to control the real estate market has been a complete failure there. In fact, such policies have led to a severe real estate crisis, resulting in rising bad debts for banks and a slowdown in economic growth.

In response to these adverse effects, Chinese authorities have recently implemented measures to increase lending and relax restrictions to support domestic property developers. However, results remain “minimal”, he argued.

Vietnam’s real estate market is currently experiencing a “freeze”, despite reported increases in property prices, Nghia noted. He attributed this to a wait-and-see approach on the enforcement of three new laws – the 2023 Housing Law, the 2023 Real Estate Business Law and the 2024 Land Law. He asserted that the core issue is not about taxing properties or tightening credit.

“We must understand that credit in Vietnam largely revolves around real estate lending, constituting about 30% of the total. In the current challenging economic climate, with only a slight recovery in exports, weak domestic consumption and nine-month credit growth of only about 7%, “we should expand credit, especially through real estate, rather than tighten it,” he noted.

To inject credit into the real estate sector, the most important step would be to increase supply by enabling more projects. This would not only support credit growth but also help reduce housing prices and increase actual transaction volumes.

Currently, there are around 1,500 projects stalled for decades in Hanoi and nearly double that in Ho Chi Minh City. If projects are mired in administrative procedures, those need to be addressed. If projects lack funds to pay land taxes, they should be provided with loans for that purpose. Stagnant projects waste land resources and fail to provide housing for the market.

“Increasing supply is the crucial issue we need to address for the property market, not taxing second homes or tightening credit,” the economist reiterated.

Regarding concerns about rising housing prices and speculation, he acknowledges that the price hikes are primarily due to speculative inflation, leading to potential bubbles. He warned that any project or real estate segment subject to speculation would face problems when the bubble bursts.

Nghia also pointed out that without real estate investments, individuals may turn to gold or stocks rather than investing in productive sectors like textiles or leather, especially in the current challenging economic environment.

Therefore, the solution lies in the hands of state management agencies, who should reduce administrative hurdles and support the real estate market by rapidly increasing new supply and resolving issues with long-stalled projects in Hanoi and HCMC.

“If we focus all efforts on addressing this issue, we can remove the difficulties in the market. Instead, if we continue to dwell on taxation and credit restrictions, where will the economy’s credit end up? Banks are not tax authorities and lack the necessary data and authority to require customers to disclose which property is their second for specific credit mechanisms or interest rates,” Nghia emphasized.

While agreeing that taxation is “indeed the only option to prevent real estate speculation,” he argued that in Vietnam’s specific context, the effectiveness of such a tax needs thorough reconsideration as the revenue generated may not outweigh costs involved in tax collection.

Data compiled by real estate website Batdongsan.co.vn shows that as of June, average real estate prices in Vietnam had increased by 24% from the beginning of 2023.

According to the Vietnam Association of Realtors (VARS), 27,335 projects entered the market in the second quarter of this year, 50% of which featured apartments. Of this, 60% were high-end apartment projects with prices of over VND50 million ($1,983) per square meter. Mid-end and affordable apartments accounted for just 14% and 7% of the supply, respectively.

The Ministry of Construction (MoC) has recently submitted to the government a proposal on taxes on second and additional properties to curb speculation and discourage short-term buying and selling for profit.

Backing the proposal, the Ministry of Finance has said it will assess relevant financial policies towards enhancing transparency in the realty market.

However, a tax policy alone cannot fully address the issue, Deputy Finance Minister Nguyen Duc Chi has remarked. “Other policies, like those related to land use and urban planning, should also be aligned (with the measure).”