Will a closed credit loop break the deadlock in the real estate market?

After four interest rate cuts since the beginning of the year, the State Bank of Vietnam (SBV) has signaled a policy reversal from cautious to controlled easing. However, for real estate businesses, the interest rate issue is less important than whether or not they can access capital.

Closed-loop credit system for the real estate market (Figure 1) — Economist , Dr. Nguyen Tri Hieu

Recently, there have been suggestions to promote real estate credit through a "closed-loop" model. Accordingly, the banking sector could research and implement real estate credit packages for certain price segments (mid-range and below). Credit would be disbursed in a closed loop, with the bank controlling 100% of the cash flow (bank - home buyer - developer - bank).

With this solution, developers will incur a slight loss when lowering selling prices, but it will help clear inventory. This solution is expected to help address the housing problem for people with significant financial resources and room for maneuver, and to help banks disburse credit selectively and with controlled risks…

However, economist Dr. Nguyen Tri Hieu argues that the reality of the real estate market needs to be re-evaluated in terms of the relationship between the three parties: banks, developers, and homebuyers. He points out that in the US, banks only lend to homebuyers after the project is completed, allowing them to assess the value so that customers have the money to pay the developer.

"In Vietnam, the approach is more innovative but somewhat risky: developers encourage homebuyers to pay deposits and installments according to the project's progress. This means developers borrow from banks to develop future projects, but simultaneously collect money from homebuyers. When they have more money, they use it to finance other projects. This 'double-dealing' approach risks projects not being completed, while homebuyers have already paid," the expert analyzed.

Accordingly, Dr. Nguyen Tri Hieu raised the issue of how to control the flow of money so that ultimately, homebuyers get their homes, banks collect their money, and developers complete their projects and make a profit. He argued that, in reality, Vietnam currently lacks a mechanism for a closed credit cycle, as many problems arise during project implementation.

"The simple solution is that for each future development project, when homebuyers make payments, they will directly pay the bank to deduct it from the project developer's outstanding debt. Although the project developer has the future development project as collateral, its value will gradually decrease as the asset is sold to homebuyers and deducted from the initial asset held by the bank. Therefore, the bank will only accept the decrease in the value of the collateral when the outstanding debt decreases accordingly," the expert stated.

Dr. Nguyen Tri Hieu believes that the current "bottleneck" in real estate credit is due to banks' inability to control cash flow, thus making them hesitant to lend in the context of a frozen real estate market. Accordingly, he proposed three solutions to unblock real estate credit.

Firstly, current standards for real estate lending must not be lowered. Businesses must still calculate and ensure cash flow, profitability ratios, and financial leverage ratios.

Secondly, borrowing businesses must restructure their financial systems and cash flow in order to repay their debts.

Thirdly, there should be a special loan program to support social housing, similar to the 30 trillion VND package that was previously implemented, supporting businesses that provide products that meet the needs of the majority of society.

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