I recently had a vivid discussion with a friend about whether or not the property markets in Vietnam and some other Asian countries are overpriced or even showing signs of a bubble. I pretended that I have gained a pretty good feeling for exaggerations in markets – yes, my fascination for “crazy” markets actually started when I was still a teenager and I lost a large amount of my savings in the dotcom bubble. Only some years later, I started a career in banking as an asset manager. At the end of 2006, I began to have some bad feelings about the US-property market conditions and I predicted a sharp decline in the oil market. We all know what happened two years later. When I was recently asked by my friend about the conditions of the Vietnamese property market, I needed to confess that I have no clue in which direction it will go. I am not as alert as you might think.

Everyone is talking about crazy prices…

There are stories of entire areas in Ho Chi Minh City, Hanoi or Da Nang where property was sold faster than rice bags only on the basis of speculation and people sold their houses and their newly bought piece of land in mortgage only to afford another plot of land. In these situations, people get greedy and some of them will fail badly. When we hear these stories, then I agree that there are crazy exaggerations.

We continued our discussion about ratios and the question of how much time a middle class Vietnamese family will need to pay off their mortgage when their monthly savings rate is $1,000 USD and their mortgage (for which they have to pay around 9% interest) is $130,000 USD. They will be finished in around 40 years. The property price/income ratio shows signs of an overheating market for some areas and it gets worse when you realize that there is almost no more middle class family house in the big cities below $200,000 USD.

…until I told them what I discussed with several Vietnamese people about the cultural implications of the property market.

I was curious as to what were the drivers behind such a development and therefore talked to some property owners. They told me what it means for a Vietnamese person to own a house and I needed to realize that it differs largely from what I used to believe. Owning a house means, first and foremost, security.

Legal security

To the Vietnamese, living in their own house usually means that they cannot be forced by anybody to leave their place and that nobody can demand steep prices for the rent. Although there might be laws to protect you as a tenant, legal enforcement remains difficult in Vietnam. Legal security is especially important for families with children. Many Vietnamese would be reluctant to have their own children unless they have their own house.

Value retention

Although inflation has been decent in the past seven years, the fear of losing money is still pervasive. When I asked property owners what they would do if they urgently needed money, they would tell me that they will sell it – just as if it is normal that a property can be sold quickly. I sometimes even got the impression that land register records are considered the better currency by some Vietnamese. I met people who would rather invest their savings in a plot of land for six months than making a time deposit in the bank. This behavior shows a strong skepticism towards the value of money.

Paying a rent is “giving money away”

I grew up with the perception when being a tenant, I can keep my financial reserves for other situations, that I am flexible when I want to move and I do not need to care for the property sale when I want to return the house. Furthermore, I do not need to repair the house if something gets broken and I do not need to build savings for major renovations. My costs of opportunity are low. Hence, I do not consider the rent I pay as money given away, but as a yield I pay to the owner while, in return, I receive flexibility. Investing in my education earns me a higher yield than investing it into a house in Europe. I could hardly explain this point of view to a Vietnamese conversational partner. Their wish to own a house usually outweighs all other wishes and costs of opportunity do not play a role. So, in their perception, the money you need to pay as a tenant is money given away to someone else.

Have you considered cultural implications in your business?

Given the three aforementioned examples, we see that there are cultural implications in the market that naturally drive demand – despite high prices. Furthermore, we should not forget that buying property in the three big cities is an investment into the big urbanization story of the country and Asia. When compared to some major Chinese cities, Hanoi, Ho Chi Minh City and Da Nang are still less expensive. So the question remains – where is the market equilibrium? This blog post is not supposed to provide an answer to this questions. It is supposed to let you ask further questions. When entering a foreign market – have we considered cultural implications well before we make decisions? Do we know what drives supply and demand and do we understand consumer behavior? Cultural beliefs have an impact on the market economy and if we do not know them, our risk of making incorrect decisions are high.