The real estate sector has continued to face challenges even after multiple rounds of interest rate cuts. It has struggled to absorb the available capital, causing businesses to be cautious about taking on loans due to a lack of promising growth opportunities.

This caution raises concerns about their ability to manage existing debts. Consequently, banks find themselves with excess cash but struggle to find willing borrowers. This situation has a detrimental impact on economic activity and hinders the flow of credit. A new approach is needed to address these issues. Demand slump stalls credit growth The real estate sector has dominated credit allocation, overshadowing other industries and raising concerns about overheating and imbalances. Data from the State Bank of Vietnam (SBV) showed that outstanding loans for the real estate sector had amounted to VND2.74 quadrillion by the end of September, a 6.04% increase against the end of 2022. This accounts for 21.46% of the total outstanding loans in the economy. Notably, 64% of this credit is used for personal purposes, while the remaining 36% supports real estate business activities. A recent study by the Vietnam Real Estate Research Institute (VIRES) suggested that monetary policy options are limited, with interest rate cuts being the only remaining avenue. However, even with lower interest rates, businesses, including the real estate sector, are hesitant to utilize available capital. Many companies, facing a lack of promising ventures and concerned about their debt repayment capacity, are reluctant to borrow, complicating the lending landscape further. Businesses, uncertain about the future, are no longer borrowing as heavily as before. Instead, they are focused on cost-cutting, reducing production, and preparing for whatever challenges lie ahead. This results in a paradoxical situation where banks are eager to lend but struggle to find willing borrowers. Vietnam’s current economic challenges are rooted in weakened aggregate demand. While trade activities are yet to reach pre-2022 export levels despite positive signs, the real estate market, particularly residential and rentals, faces liquidity and confidence issues, with numerous projects mired in legal complexities. This stagnation contributes to an overall decline in demand, impacting GDP growth. Injecting more credit into businesses on shaky economic ground carries potential risks, as it could strain the health of the banking system before translating into increased production. “Injecting credit into an economy with limited absorptive capacity could backfire and thus require careful consideration. With demand weak and businesses hesitant, there is a high risk this credit will not translate into growth, but instead inflate a bubble that could burst,” said researchers. Businesses need to find a way out The real estate industry is teetering on the edge as the pandemic-battered economy faces a downward spiral, aggravated by turbulence in the global market. Real estate businesses are confronting unprecedented challenges, surpassing the difficulties of the past decade. According to the General Statistics Office, a staggering 1,067 real estate firms had disappeared in the year through October, marking a 9.5% increase compared to the same period in 2022. This means that 107 real estate companies are exiting the market every month. In contrast, new real estate startups have declined by half compared to the January-October period in 2022. Regarding operational performance, the National Private Economic Development Research Board (Board IV) reported that the property and construction industries have suffered the most significant revenue decline, facing a sharp drop since the second half of 2022. They remain ensnared in shrinking revenue, and by the end of the second quarter of 2023, cash flow problems have intensified as accounts receivable accumulate, and inventory remains idle, casting a shadow on construction and real estate firms. Struggling to survive, businesses across the economy are increasingly reliant on monetary policy support. However, the central bank’s efforts to supply credit to the economy face challenges as businesses fail to meet the requirements. Board IV expressed doubt about whether monetary policy alone could be the optimal solution to rescue the real estate industry from the current crisis, despite repeated adaptation and reform attempts. It raised concerns about the effectiveness of the current approach, highlighting the paradox of a cash-strapped market unable to absorb available capital. While credit growth quotas have been expanded by 7% in November and December, indicating significant potential for expansion and the strong lending capacity of banks, credit growth remains sluggish. This underscores the need for credit policy change to stimulate growth, including supportive regulations and products that align with market demand and boost business access to credit. Real estate companies must not solely rely on bank loans. To ensure sustainable growth, they should restructure, even if it means offering products at significant discounts, to weather this challenging period. Then, they can regain their financial stability and tap into credit markets. Project developers should also rethink their product offerings, moving beyond luxury markets and catering to price points that match consumers’ budgets. Addressing the genuine needs of the majority, not just a niche segment, is vital to prevent market instability, according to VIRES experts.