Overseas Vietnamese businessman Alan Phan calls on the government not to bail out the property sector, instead to let land prices free-fall in order to help poor people get a house.

Phan has published a story on his official blog in reply to 16 questions from a 1,000-strong Hanoi Real Estate Agency (HREA) on his opinions about the coming real estate bailout plans.

The 3,000-word story, “a letter to 1,000 colleagues” [Phan used to be a realty investor-developer in the US back in the 1980s], shows his “expectation that local realty investors should sacrifice their personal interests to share with the less fortunate people so that they can have a chance to buy a house.”

The reply letter came after HREA sent a 15- question request for Phan last Thursday, asking him to clarify his ideas he told the media a week earlier that the realty sector should be “drop dead” [the wording used by US President Gerald Ford in an article in 1976 - Ford to City: Drop Dead].

“My point is to just let the real estate be on a free fall, which would cause house prices to fall further by 30-50 percent to catch up with the income of the people.”

“After owning a house, the people will have more confidence and this is a big stimulus that can reboot the economy,” he added.

Used to work as a real estate investor in the U.S. with seven glorious years, Alan Phan and his partners declared bankruptcy after pouring all the money into a large project in Arizona in 1982, so Phan said he sympathizes with the current situation of local real estate investors.

Core issues

According to Phan, the current real estate crisis was a miscalculation of the investors and developers on the prices and types of goods they offer for the market.

Unreasonable cost structures leading to only a handful of low-income housing projects with very high demand completed, while higher-end segments, which are unaffordable for most of the population, are abundant.

Surplus supply in higher-end housing will take a decade for its inventories to be cleared, he added.

Phan said local investors often use the costs of land, building materials, administrative costs and under-the-table costs as an excuse for sky-high home prices.

In the 1995-2006 period, when housing prices rise [by double-digit annually], no one proposed that the government must intervene.

But now, the investors are expecting the government to come to the rescue. It seems like football players suddenly asked the referee to apply new rules when the match has gone more than half.

Mentioning his failure in Arizona, Phan said because he did not expect interest rates to shoot up to 16-18 percent instead of 8-9 percent as earlier calculated. "Though the error is not subjective, we understand the rules of the market and bowed to accept," he said.

According Phan, all of the recession, stagnation and inefficiency in industrialization, the modernization of agriculture, education, and healthcare, are mostly due to the financial bubbles in real estate, securities, and banking.

When the cash flow is channeled into these areas, it is easy to sacrifice the necessary social investments in the long-term, such as healthcare, education, research and development for high technology, and agriculture.

Regarding his forecast that over 50 percent of real estate enterprises - construction material firms, as well as 50 percent of the major banks will be wiped out because of unrecoverable bad debt cause by the realty bubbles, Alan Phan said that those institutions are ‘clinically dead’ and do not contribute anything to national output while continue usurping national resources.

Given that the consequence when the real estate bubble bursts such as tens of thousands of the 53 million workers nationwide will be affected, and the people will lose their money deposited in banks, Phan said that the economy will then recover, thus job creation, and as all bank accounts will be insured up to VND50 million as promised by the government.

Mixed aftermath

According to Dr Phan, there will be some positive consequences when the real estate bubble burst.

Specifically, several hundred thousand families, for the first time in their life, will own an affordable house, the psychological effect of which will boost confidence stimulating aggregate demand for the whole economy.

Of these, the most important is the creation of a new middle class, which is an essential factor for any sustainable development.

Looking through the social expansion in the developed world, like Europe, US, Japan, and Australia, the middle class and their development is often the main engines for the economy to develop as they create the largest consumer market and the biggest number of taxpayers.

If state agencies choose to print more money for the bailout, it will fuel inflation and devalue the Vietnamese dong.

With the current budget deficit, narrowing revenues due to economic slowdown, allocating state-funded financial resources to feed those non-manufacturing sector will help prolong the recession.

“That property values in Vietnam have been reported to be at 25 times the average income per capita is a remarkable achievement that should be recorded by the Guinness,” he said.

Foreign experts have estimated that some $60 billion worth of capitals are in reserve among the local people, and some $20 billion can be added by overseas Vietnamese and foreign investors, which is "quite sufficient to solve all the real estate inventory," as long as confidence regained.

Alan Phan is an entrepreneur with 43 years of experiences doing business in the U.S. and China. He is the first overseas Vietnamese to list his private company- Hartcourt - on the American Stock Exchange in 1987. The company’s market cap reached its height at $670 million in 1999.