Research on the impact of real estate prices on bank credit

CHAPTER 1: THEORETICAL BASIS IMPACT OF REAL ESTATE PRICES ON BANK CREDIT

1.1.1 The concept of real estate prices

Definition: Real estate price is the value of real estate through the selling price. This amount may differ from market value depending on a number of factors, such as seller concessions for a quick sale (George H.Miller and Katy R. Gallagher, 1998).

In Vietnam, there are the following concepts:

Real estate price is the monetary expression of the value of real estate goods recognized in the market. In a market economy, the price of real estate assets is the market price of that real estate, it is determined as the amount that can be received from one or more people who are willing and able to buy a certain real estate when this property is sold. put up for sale. The market price binds real estate traders and consumers together, this price both reflects the value and is consistent with the purchasing power of the currency and is also affected by the law of supply and demand. The market price of the property is also the buying and selling price of the property and this price is available only when the transaction is completed and that is also the best price offered in the market. The parties to the transaction are all voluntary and have perfect information about the real estate they will participate in buying or selling (Vietnam Open Educational Resources).

Like other common goods, real estate prices are formed on the basis of the supply-demand relationship of real estate in the market. The essence of real estate prices: the price is the monetary expression of the property’s value that the seller and the buyer can accept. Includes land and house prices. Land has no cost of production. The value of land partly generated by nature, partly due to human exploitation and use of land is called “land value” (capitalized rent). The greater the benefits obtained from the land, the higher its value. In a market economy, land is bought, sold and transferred, resulting in land having “exchange value”. The value of land is expressed in monetary form, which is the “price of land” commonly known as land price. The house price is calculated by the cost of materials and other costs necessary to build the house (Department of Housing and Real Estate Market Management – Ministry of Construction, 2009).

1.1.2 Factors affecting real estate prices

The prices of all real estate are influenced by physical, economic, political and social factors:

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Material factors:

– The size, shape and location of the property.

– Drainage system, water source.

– Minerals underground, the composition of the soil.

– Climate.

– Near schools, shopping and entertainment…

Economical factors:

– Expansion or contraction of basic industrial output.

– Expanding or narrowing the activities of local government.

– New discovery or depletion of existing resources.

– Availability or absence of mortgage markets to extend credit.

– Unemployment rate.

Political factors:

– Financial security.

– Local planning and construction policy.

– Affordable housing and subsidies.

– Environmental protection policy.

– Local tax.

– Local regulations on business and industry. Social factors

– Pride of ownership.

– Attitudes of people.

– Population change, family size (George H.Miller and Katy R. Gallagher, 1998).

In addition, there are other factors such as:

Economic growth:

– Housing needs depend on income. Strong economic growth and increased income, people will spend more on housing; This will increase demand and drive up prices

– In fact, housing demand is often elastic with income, increasing income leads to a larger % increase in spending on housing in income.

In a similar recession, falling incomes make people unable to buy homes and those who lose their jobs will sink deep into their mortgage payments and end up losing their homes. recovered (Pettinger, 2013).

Interest rate:

The interest rate affects the cost of your monthly mortgage payments. A period of high interest rates will increase the cost of mortgage payments and will reduce the need to buy a home. High interest rates make renting more attractive than buying a home (Pettinger, 2013).

Consumer confidence:

Trust is important for deciding whether to take the risk when mortgaging a property. In particular, the expectation on the real estate market is very important; If buyers are afraid of falling home prices, they will delay buying properties.

Availability of mortgage loans:

– During the economic boom, many banks were very interested in mortgage lending. They allow loans many times the income. Also banks have very low deposit requirements (for example loans up to 100% collateral). This means that it is easier to get a mortgage, the demand for housing will increase, more people will be able to buy a home.

However, if after a credit crisis, banks tighten lending standards, requiring a larger deposit to buy a house. This reduces the availability of mortgage loans and the demand for debt will decrease. (Pettinger, 2013).

Real estate supply:

When the supply of real estate exceeds the demand, it will lead to a decrease in real estate prices. Conversely, when supply is not enough to meet demand, such a shortage will lead to rising housing prices. (Pettinger, 2013).

Some specific factors affecting real estate prices in Vietnam:

Real estate prices depend largely on the supply-demand relationship in the market. When demand is greater than supply, real estate prices are often pushed up; Conversely, when demand is lower than supply, real estate prices tend to fall. However, the price also depends on many other factors such as those stemming from the defects of the market such as “monopoly”, “speculation”, “unfair competition”, etc. Factors stemming from State intervention such as State investment in upgrading residential infrastructure (roads, water supply and drainage, electricity supply…), tax increase or reduction for real estate businesses, applying the auction of state-owned real estate assets, housing policies for low-income people…; There are factors that originate from the psychology and habits of people such as not wanting to sell houses and land left by their fathers, or not wanting to live in apartment buildings, or wanting to have houses located on national highways, provincial roads… (Department of Housing and Real Estate Market Management – Ministry of Construction, 2009).

There are 3 groups of factors affecting real estate prices in particular as well as real estate in general, namely:

1.1.2.1. Factors that have a direct relationship with real estate

Group of natural elements:

– Location of real estate: the higher the profitability of the real estate location factor, the greater the value of the real estate. Each real estate always exists at the same time 2 types of location, absolute location and relative position. In general, both types of locations above have an important role in determining the value of real estate. Real estate located in the urban center or a certain area will have a greater value than real estate of the same type located in the suburbs (relative location). Real estate located at 4 or 3 intersections, on important traffic roads has a higher value than properties located in other locations (absolute location). Considering the advantage of real estate location is extremely important, especially for determining land prices.

– Size, shape, area of land plot or plot of land: an optimal size and area of land plot when it satisfies a specific type of need of the majority of the population in the area. For example, in Hanoi, with residential demand, the optimal size and area is when the frontage of the plot is from 4m-5m and the depth of the plot is from 10m-15m.

– Topography of real estate located: the topography where the property is located is high or low compared to other properties in the vicinity that affects the value of the property. In low-lying areas, often flooded in the rainy season or subject to high tides, the price of real estate will be low, on the contrary, its price will be higher.

– Appearance (architecture) of the real estate (for real estate that is a house or other construction works): if two real estates have the same construction price, which property has the right architecture to suit tastes, the value will be its will be higher and vice versa.

– Characteristics above ground and underground (thickness of the surface layer, soil properties, physical properties…). The degree of influence of the above factors on the value of real estate depends on the purpose of land use. For example, soil fertility may be important for land value when used for agricultural purposes, but not when used for construction.

– Environmental status: fresh or heavily polluted environment, quiet or noisy, all directly affect the value of real estate.

– The conveniences and risks of nature: real estate located in areas often affected by natural disasters (storms, floods, earthquakes, extreme climate…) decrease and vice versa.

Group of economic factors:

– Ability to bring in income from real estate: The annual income from real estate will have an important influence on the value of that real estate. The higher the ability to generate income from real estate, the higher its transfer price and vice versa.

– Facilities associated with real estate: such as electricity, water, sanitation, air conditioning, communication systems. The more complete the facilities and the better the quality, the more the real estate value will increase.

Group of factors related to the market:

– The usefulness of real estate;

– Demand for real estate in the market. (Department of Housing and Real Estate Market Management – Ministry of Construction, 2009)

1.1.2.2 Legal factors related to real estate

Legal status of real estate: legal documents on land use rights, house ownership, construction permits, etc. are available.

Regulations on construction and architecture associated with real estate, restrictions on land use rights, ownership of houses and other construction works associated with real estate: status of lease, mortgage of real estate, status of disputes over use rights land use, home ownership, restrictions on joint ownership (e.g. houses built in areas where an airplane’s runways are not higher than 3 floors…) (Department of Housing and Market Administration) Real Estate – Ministry of Construction, 2009).

1.1.2.3 External factors

Legal and political factors: the change in policies of the State and local authorities may have an impact on the operation of the real estate market in general and investment in the real estate sector in particular. Detail:

– Policies that have an indirect impact such as: the encouragement of external investment in the locality can increase the demand for real estate, which can lead to an increase in real estate prices.

– Direct impact policies such as:

+ Policy to allow overseas Vietnamese to buy real estate in Vietnam

+ The policy allows people without city registration to buy houses in the city.

Financial policies apply to people who are allocated or leased land by the State…

+ Credit policy for investment activities in the field of real estate.

+ Tax policies of the State for real estate.

Macroeconomic factors:

These are related economic factors such as:

– Real estate supply and demand situation in the region.

– Characteristics of the real estate market participants in the region.

– Conditions of the real estate market in the region.

– Current status of the vicinity (infrastructure such as roads, water supply and drainage systems, electricity supply, communication…).

– The annual GDP growth rate of the region affects income, economic confidence in the future and thereby affects the supply and demand of real estate.

– The average annual income of people in the region (high, medium or low) compared to other regions.

– The ability to meet the credit needs of the credit system in the region;

– The average price of all types of land located in the same area.

– Tax rates and tax rates.

– General level of inflation.

– The situation of labor market, stock market, credit market in the region.

Social factors:

Social factors also have a big impact on real estate value. An area where the population density suddenly increases due to the mechanical population growth rate, the real estate value there will increase because the supply-demand balance is disrupted. On the other hand, other factors in the region such as the quality of health services, education, education level, security issues, and local people’s habits also affect the value of real estate. Status of people living in real estate, health status, occupation and employment status, family and social emotional relationships of people living together… Issues related to feng shui theory . (Department of Housing and Real Estate Market Management – Ministry of Construction, 2009)

1.1.3 Real estate valuation method

There are five basic methods for valuing real estate:

Comparative method:

The market approach is the best of the 5 methods, as it is the most direct. To be effective, three conditions must be met: first, there must be a correct number of recent sales prices, usually between three and five. Second, the sale price information must be available in order to make the valuation. In some cases, and for a variety of reasons, this information is not disclosed to the public by people knowledgeable about prices and terms of business. Third, analysis of available prices should be done by someone knowledgeable in such matters.