Lending to real estate investment should be tightened: Experts

Economic experts have recommended to the government to tighten up the lending activities for real estate investment. The experts were speaking at a seminar on economic growth model – financial resource allocation and the role of private economic sector held by the National Assembly’s Economic wing in the morning of August 31, 2010 in Hanoi.

Prof Dr Hansjörg Herr, Professor for Economics at the Berlin School of Economics and Law while speaking at the seminar gave an example on the mechanism for expanding credit to production area in the regions and countries in East Asia that achieved economic feats for a long time in the 1950s, 1960s, such as Japan, Korea, Taiwan, Singapore, and Malaysia, etc. The example shows that these countries’ credit-expanding activities had focused on industrial economic sector, and close cooperation between major corporations, banks and the state were established. According to this credit orientation, people could almost have no access to consumer loans and the credit expanding to real estate was also tightened, said Prof Dr Herr said.

According to Prof Dr Herr, if credit were expanded into investments of industrial areas, it would work to support the development. Otherwise, if funding for a speculative real estate, in medium term, dept ratio would also increase without achieving sustainable development. The consumption loans for households would also bring similar risks, which the mortgage crisis in the US in 2000s could be impressive evidence, added Prof Dr Herr.

Prof Dr Herr recommended that an increase in credit loan to the non-manufacturing sectors would lead to a crisis and halt the credit granting. Therefore, credit loans should be used for the development of industrial areas and must not be used for the expansion of consumption loans as well as funding for real estate bubbles.

Sharing the same point, Dr Pham Hong Chuong, from Hanoi National Economics University said that there has been too much lending to the sectors, which could not create social wealth, such as real estate. That is an existing problem that Vietnam has not yet been able to resolve.

Fluctuations of the real estate market have created two negative attitudes to development. Firstly, all costs of production have been increased, as once price of real estate goes up, prices offered in other sectors will go up accordingly. Secondly, the business motivation has been eliminated, because for manufacturing sector, it is very difficult to achieve profit from a few million dollars to dozens of million dollars, whereas gaining a couple of millions of dollar profit or even dozens of million dollars is not too much difficult if investing and speculating in real estate sector of Vietnam.

Thus the entire essences of Vietnam, instead of being invested into production and business operations, have been poured in real estate. This has eliminated the business motivation, and increased the business costs. However, for the reality that banks have offered too many loans for real estate sector as in the recent time, if the real estate market is made crippled in order to solve the above problem, the entire banking system might be broken, said Dr Chuong.

According to Dr Chuong, currently, no solutions have been found, but must be found in the near future and the government is the first to be responsible in performing this task. – Thanhnien

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial, Vietnam real estate investment

Posted by VBN on Sep 5 2010. Filed under Banking-Finance. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry