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Vietnam's property market: Shades of '98?

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25 September 2008 14:58

Guest blogger: James Symons is a Lowy Institute intern.

I recently returned from a stint as an AusAID volunteer in Hanoi, Vietnam, and I can tell you, there is nothing like being on the ground for a year and listening to expatriate street buzz to put a few dings in my perceptions.

All I heard about before heading off was that Vietnam’s economy had been growing at an astronomical rate; WTO entry meant more FDI and capital accumulation. Everywhere I looked, people were knocking down houses and putting up new ones, and on the Red River dyke road from Hanoi airport, visitors could hardly miss the gargantuan development that will include, upon completion, over 50 apartment blocks, dozens of restaurants and a golf course (not to mention an enormous statue-adorned edifice at one entry which gives the Brandenburg gate a run for its money – until one realizes that the horses are made of fiberglass).

CB Richard Ellis produced a media release to sum up their 2007:

State Owned Companies are privatizing and demanding quality office space adding further pressure to the market; the office, hotel, retail, industrial and serviced apartment sectors need more quality supply urgently as demand is ever increasing. It’s a fantastic time to invest in the real estate sector with 2008 expected to see continued growth.

It wasn’t too long before the locals started to believe the hype, and around a year ago the Vietnam Real Estate Explorer reported that some firms in Ho Chi Minh City had raised square-meter rental prices by up to 350%.

But here’s the rub. An expat property manager told me, with barely concealed exasperation, how a deal with a commercial renter had fallen through because the Vietnamese owner refused to budge on a revised price forecast after it became apparent that supply was outstripping demand. He preferred to leave it unoccupied than lose face by accepting the lower price that had been adjusted by the logic of the market. All of a sudden, anecdotes started circulating about empty apartment blocks – and still they were being built.

At this point any economist worth their salt should start to hear a few alarm bells. For the layman like me, it is worth heeding the observations of former World Bank chief economist, now champion of anti-free traders, Joseph Stiglitz, talking about the East Asian financial crisis:

There was a real estate bubble. Bank contraction in Japan led to credit contraction in Thailand, and the real estate bubble burst. When capital stopped flowing in, there was pressure for the exchange rate to fall, the government tried to support it, and in a short time it spent enormous amounts of money and used up its reserves.

The 2008 Index of Economic Freedom highlights two indicators of concern for Vietnam. Firstly, property rights rank at a lowly 10%, meaning that a proper system of protection, laws and enforcement does not exist. Secondly, Vietnam still ranks very low in terms of its ‘freedom from corruption’ barometer, which comes in at 26%. These are precisely the kind of conditions which, if the real estate bubble bursts, can lead to the kind of wholesale asset stripping which kicked the Baht when it was down during 1997-98.

With inflation still rampant, prompting greater attention from the IMF, we are yet to see whether a real estate bubble in another part of the world might result in shades of ’98… and the loss of a few fiberglass horses.

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