Does Vietnam risk a second real estate bubble?

This along with the recognition that the Vietnamese economic system routinely produces bubbles and is unlikely to change any time soon has given rise to concern by many leading mainstream economists.

From the beginning of the year, real estate prices in Hanoi have been headed sharply upward driven by the pricey transactions in the medium and high-end housing segment led by Goldmark City, FLC Complex, Hong Kong Tower, Five Star Garden complex, and Park 3 Building of Vinhomes Times City.

Despite the high prices ranging from VND22-28 million/m2, even up to VND35-40 million/m2, housing units in the segment have been selling well.

For example, a 70 m2 apartment in the Park 3 Building at Vinhomes City Times City recently sold for VND2.5 billion.

According to the Ministry of Construction, from January leading up to March, the property market continued to show signs of robust vitality with sales outpacing  last year’s corresponding period by threefold.

In March alone, Hanoi had 1,500 successful transactions, up 25% from one month earlier.

The Ministry of Planning and Investment (MIP)’s Foreign Investment Agency reported the real estate industry ranked second in the first quarter of this year with new and supplementary FDI capital of US$203 million.

CBRE Vietnam Co Ltd, a foreign property consulting service provider in Vietnam, said the number of high-end sales in the quarter were higher than that of any quarter during the period 2012-2014.

Green Earth Joint Stock Company General Director Vu Cuong Quyet said over recent years, the property market has principally concentrated on lower-end commercial and social housing projects without heavy investment in middle and high-class units.

The increased supply in the higher end segment will help create more liquidity, thus encouraging investors to return to middle and high-class housing projects, Quyet noted.

However, it is worth noting that there was a marked increase of 3-10% in many housing projects across all segments. The rise was most noticeable in the secondary markets.

To meet the growing demand for home purchases, investors had to focus on the factors of home buyers’ concern such as good service quality, environmental landscape, convenient facilities, and ensured construction progress.

Vietnam–Germany Real Estate Club Vice President Nguyen The Tiep said the real estate market has recovered, but approximately VND70,700 billion of bad debts remain to be dealt with.

Home buyers’ demand in all segments is at an all-time high but the focus is only on housing projects having favourable locations while the projects of this kind are not as many as expected.

Price increases in unison in numerous property projects can lead to a  –  bubble –  state unless an overall control mechanism to control the situation is devised, Tiep added.

He also warned that artificially-inflated price rigging would antagonize consumer confidence and adversely affect the liquidity of a certain segment or the whole real estate market.

In other words, a sharp fall in artificially high prices would produce a raft of nonperforming loans and precipitate a real-estate collapse that could lead to a banking crisis—the kind of woes that have undermined Vietnam’s economy in the past.