The rising home price-to-income ratio in HCMC
Housing affordability becomes increasingly stretched in Vietnam’s big cities. What implications will it have on the market’s next move?
Housing affordability has always been a problem in big cities such as Ho Chi Minh City (HCMC). The situation seemed to have improved during 2014-2018, when the market received healthy supply each year, but housing affordability again became a growing concern by the end of 2020. As of 1Q21 end, there are limited options for HCMC citizens looking for affordable apartment projects with only about 5,000 affordable units available on the market. Notwithstanding, the survey conducted by HCMC Department of Construction in 2019 shows that about 500,000 households in the city still have not had their own houses and either living with their relatives or renting houses; 94% of these non-home-owning households have the demand for houses having price less than USD 44,000 per unit.
Figure 1: Number of affordable units available for sale and affordable apartment price to income
Source: JLL Research estimates, 2020
The price-to-income ratio for affordable apartments has been rising over the past 5 years and nearly reaching a 15-year record high of 5.8 witnessed in 2007. The current illusion of affordability created by the current low-interest rates, minimum down payment requirement, and the longer-than-ever grace period supported by developers has also intensified this trend. The sign of residents’ increasing willingness in taking loan for both consumer spending and mortgage purposes has been statistically supported by the rise in proportion of household loans held by the "Big 4" banks from 28 percent in 2013 to 46 percent in 2020.
Major reasons underlying this dramatic change in market average prices are:
- The lengthy approval procedure for new developments that started late 2018 has impeded developers’ ability to launch their projects as planned. Consequently, extra costs incurred such as interest on loans or operating costs are eventually built into the selling price.
- There is limited supply because of delayed legal approvals, while demand remains strong despite the lingering pandemic feeding price escalation across the city.
- The disruption in the supply chain caused by the pandemic has resulted in higher costs for building material, which again is translated into the higher selling price.
- As Vietnam’s economy is regaining growth momentum even amid the pandemic, many people seem to be too optimistic about their future income and go ahead with purchasing an apartment that might be a bit too much for them to afford.
The increasing home price-to-income ratio alone cannot show the oversupply in any market. Instead it projects that the market is developing unequally, and the structural market adjustment is waiting on the horizon.
What does this mean for developers?
- In an emerging market like Vietnam, it is unlikely that the price will go back to the level before the upswing period. However, as the price is currently growing out step of the fundamentals, it will likely be stagnant after reaching a certain level until the income catches up with the house prices to some extent. Besides, an influx of new supply is expected in the market when the current legal issue is tackled, thus helping to ease the price pressure. On that account, developers should adopt a “cautiously” optimistic approach to their existing investment strategies and future projections.
- Finally, while waiting for the situation to be improved, which will likely take time, the increasing housing demand amid the supply constraint might spark new ideas about the housing model or concept to capitalise on this unserved demand. The big reward will be for the first mover.
 Typical price range of Affordable segment: <US$ 1,2000 per sqm, excluding VAT and sinking fund
 JLL Research estimates based on affordable primary market price, Oxford Economic data and a set of assumptions on unit size and banking loan support, 2020 update
 The grade period is the time between when a loan is disbursed by the bank and when the borrower begins making payments on that loan.
 According to the HSBC report “Vietnam At A Glance – What do banks' balance sheets tell us” published in 2020. The report noted that the estimate for household debt is broad, as it includes personal loans used for business purposes. “Big 4” consists of Vietcombank, BIDV, Vietinbank and Agribank.