If you have lived in Vietnam recently, you must have noticed the feverish growing of the asset prices in Vietnam. The housing price has been rising ever since I was in Vietnam in 2001. I have no data for Vietnam, but here is the US house prices as an eye candy:
Since the 2008 recession in the US is believed to be the result of a sub-prime mortgage crisis, many people are worried that the same situation is going to happen in Vietnam . There are many hot questions that come with this worry: Is it really a bubble? What caused such a rapid increase in price? When is it going to burst? How can I protect myself from it?
These questions seem short but they are very hard questions that require much thoughts. Personally, I don’t think anyone knows when the bubble is going to burst. But beside that, let’s see if this phenomenon really is a “bubble”?
When people talk about “bubble”, they are referring to a situation when assets are bought and sold at prices above their normal market price. But how do we know normal market price is “normal“? Actually, we don’t know. We only know whether the prices have been tampered with. To do this, economists simultaneously look at the time-graph of the loans interest rates and economy’s money stock. If the money stock stays constant over the years, the interest rates are at their natural level. However, if the money stock increases, the interest rates decrease and vice versa.
Wait, why so?
Well, think about it this way. When the central bank wants to increase the money stock, it does so by lending the money to the bankers. When the bankers have many loans on hand, they are willing to give them out at a lower interest rate to attract customers from other banks (but still keep a good level of profit due to a larger number of loans).
So what happens when the interest rates are lower than “normal”?
Lower interest rates mean cheaper houses! It’s time to buy, buy, and buy! And some people buy multiple houses as investments. This also means that the demand for loans is soaring up and and cause an increase the interest rates. The higher the interest rates, the more profitable it is to sell the houses the people bought at the lower interest rates. Unfortunately, many don’t realized that the increased money stock and lowered interest rates are distorting the price of investment. People start to mal-invest in long-term projects with irreversible decisions. This is the beginning of the “bubble”.
However, this phenomenon will ease out over time if the central bank stops putting money into the market.
But that’s not the case. Central banks usually change the money stock throughout the years, because when the interest rates are low, people buy, sell, and invest more. This means an increase in economic activities and a spike up in GDP. The chairmen of these central banks have a lot of incentive to “boost” the economy since they can ask for more budget next year. And of course, they “boost” the economy and the “bubble” at the same time.
Here’s the trillion dollars question: When do the “bubble” burst?
The burst comes when people can no longer sell their house at a ridiculous price and must lower their price. When they do so, they start a downward drift of housing prices. As a result, no one else wants to buy because they expect the price to drop further. BOOM! there’s the burst.
Also, when central banks see that the economy is growing “too fast” out of their expectations, they might tighten the money supply by withdrawing the loans from the bankers. This will raise the interest rates suddenly and can shock the home-investing folks. Again, BOOM!
Now, how applicable is this story to the case of Vietnam? I’d love to show you Vietnam’s money stock to illustrate the point. But that data is not available to me, so I’ll substitute it with an inflation graph. The reason is: when the money stock increases and people have more cash on hands, they are more generous in their purchases and drive up the price level. So, an inflation graph is an acceptable substitute:
As you can see, inflation has been on the rise in Vietnam since 2001, this suggests that the central bank of Vietnam might over-stimulated the economy. However, the drastic spike in 2008 actually eased out 2008 recession. How? Read this article of mine.
Please note that this is NOT the only driving force of the rising asset prices in Vietnam. Since China and India have been growing tremendously in the past decades, their demands have been driving raw materials prices up and contribute partly to rising prices. There are also the increase in the capital investment in Vietnam in recent years that cause some lowered interest rates.
Also, Vietnam’s financial system is not as complicated as the US. Vietnam doesn’t have a matrix of securitized mortgages yet. What do “securitized mortgages” even mean?
But, I’ll save those for another article : )
this is an excellent article! thanks for the information 🙂
Superb articles, this trend is happening in Taiwan & China as well. Makes me wonder when exactly will the bubble burst, the house in Taiwan that my parents owned, triple in price over the past 13 years, and the houses near the coast line of China doubled in prices.
It makes me wonder, what would happen when house prices become un-affordable? The trend in China is, they are moving inland, away from the well developed coast line city. I wonder if China’s situation can be apply to Taiwan or Vietnam. I don’t think Taiwan isn’t applicable in that scenario simply because the lands are scarce, but what about Vietnam?
Certainly Vietnam’s financial system is “simpler” than the US, but I wonder if the housing prices that are rising are found mainly in urban areas, and if so, whether it is in the vicinity of major foreign direct investments.
Very good article
I live in Vietnam, and I feel the big burst for this year (2011)
bank loan rate at 26%, more and more real estate project launched, house for sale which don’t find buyer, office for lease empty
banks try to attract deposit of customer to find cash again, but there is no cash anymore anywhere in Vietnam
Hi, i am individualist and had researched Vn housing price including apartment price for over 3-4 years already. for the recent one year, my research is more intense but focus still lies in HCM district.
I begun predicting an eventual burst of house price occurring after 2011 whereby the glut non ending new release apartments and commercial estates by the thousand quarterly will force some investors to off load their holding due to fall in rental, high interest rate, falling asset value, stress of servicing home loan etc
Local and foreign investors had been too optimistic about VN prior and even up to a year after joining WTO when US housing price is falling like rock in 2008. Funds poured in with estate projects increasing by year and most took 2-3 years to see their completion. As a result the burble is difficult to discern as early investors profited when supply.
Not all see it coming but I clearly see it. With foreign reserves running low, devaluation, high interest rate for lending an recent gov cutting loan by $5 billion by year end is the last screw on the coffin. Maybe the central bankers had smart finance guru realizing most businesses had in one way or another speculated and invested in real estate, decided to call it defensive by cutting loan to deflate the burble. However with the glut coming inevitably….the burble will burst.
In my speculation, many other possibilities that can accelerate the decline in estate price had not be counted in such as insufficient foreign reserve to deal with deficit payment resulting in lower rating on Vn, bankruptcy of state companies as a result of estate price falling, further devaluation of dong, exodus of foreign investors…. as i put it mentally, a negative vicious circle ensue…….it may drag other neighbouring countries into it depending on how the richs from China pull themselves and others out of this
Good research, Neil. But I think that the world’s economies are intricately woven and inter-dependent on each other, that speculating on the house market, whether in U.S., Canada, Europe or even in China will drive the “psychological feeding frenzy” up and up.
As always, there must be some forms of international laws to stop the speculator from artificially driving up the market demands as true demands for real estate is lower than what the speculators are hoping.
It’s the speculators and gamblers that are making real estate prices worldwide a bigger problem than it is.
The Austrian School of Economics has the most perfect answer. Have you read “Human Action” by Ludwig von Mises?. Go to mises.org to learn more!