4 QUARTER MODEL AND CREDIT POLICY FOR REAL ESTATE MARKET
4 QUARTER MODEL AND CREDIT POLICY FOR REAL ESTATE MARKET
Dr. Nguyen Thi Hai Yen
National Economics University
Abstract:
In recent years, the Vietnamese real estate market has been significantly affected by unfavorable global economic developments and domestic macroeconomic policies, particularly monetary policies. Many real estate businesses have faced difficulties in accessing credit loans, issuing bonds, and mobilizing funds from customers, leading to capital shortages and delays or cessation of project implementation.
This article introduces a theoretical model to study the mechanism of forming real estate economic relations, the 4Q model (four-quarter model) by DiPasquale and Wheaton. Based on the 4Q diagram describing the activities of the real estate system, the article analyzes the impact mechanism of credit policies on the real estate market and offers several recommendations for credit policies for real estate in Vietnam.
Keywords: Real estate, four-quarter model, real estate credit
I. Introduction
Real estate is a major pillar in the economy of each country and has a close correlation, creating both opportunities and risks interconnected with the financial market. In the development of the real estate market in Vietnam, bank credit plays an important role. Real estate credit creates a spillover effect on other capital flows into the real estate market, thereby affecting liquidity in the money market.
When the market is in a recovery and development phase, strong capital flows into the real estate market. This flow creates significant pressure, causing real estate prices to rise rapidly, leading to land fever in the market.
However, during a downturn, the real estate market faces difficulties, with banks halting credit for real estate and shifting to debt recovery, making it even harder for real estate investors. The decline in real estate prices reduces profits and, combined with difficulties in resources due to a lack of bank credit, stalls real estate investment activities, posing a risk of a real estate supply shortage in a new cycle.
After the subprime mortgage crisis in the United States, many studies have highlighted the importance of the real estate market for macroeconomic stability and development, focusing on policy interventions. Monetary authorities need to clearly identify the origins and nature of real estate price fluctuations to understand their implications for price stability and the overall economy, thereby developing effective countermeasures to avoid financial crises and the collapse of the real estate market.
In real estate economics research, macroeconomic aspects are highly emphasized. How do macroeconomic changes spread to the real estate market? How do financial and monetary relations affect real estate? And how do changes in the real estate market alter real estate asset prices and activities in the construction investment sectors? These issues can be discussed and analyzed using the foundational model by DiPasquale and Wheaton, the four-quarter model (4Q model).
This article introduces a theoretical model to study the mechanism of forming real estate economic relations, the four-quarter model by DiPasquale and Wheaton. Based on this, the article analyzes the impact mechanism of credit policies on the real estate market and offers several credit policy recommendations for Vietnam’s real estate sector.
II. Overview of the 4-Quarter Model (4Q Model)
The 4-Quarter Model (4Q Model) was developed by DiPasquale and Wheaton. This model consists of a 4-quarter graph (4Q), as shown in the figure below. The four quadrants describe four binary relationships between the space market (rental market) and the asset market (ownership market).
The 4Q model is suitable for simultaneously testing the impacts of the long-term equilibrium inherent in each market: the space market and the asset market, and between the two markets.
The concept of long-term equilibrium in real estate relates to allowing markets sufficient time for new construction supply to adjust to demand. Equilibrium in the 4Q model is represented by a rectangle with vertical and horizontal sides connecting four points, each line lying on one of the four binary relationships in each of the four quadrants.
The sides of the rectangle cross four axes representing: rent price, sale price, construction volume, and market supply. In the diagram below, equilibrium prices and output are represented by the points Q*, R*, P*, and C*.
First Quadrant, Northeast Quadrant:
This quadrant describes the rental prices determined in the space market, showing the quantity relationship between consumption and rental prices (called the usage/rental market). The horizontal axis represents the consumption volume of the rental market, while the vertical axis shows the rental prices. The axes of this quadrant form the price/quantity model of the rental market.
The demand function for rental space is shown in the northeast quadrant by a downward-sloping curve D, indicating how the demand for rental space depends on rental prices based on the state of the economy. If other factors remain constant, an increase in the number of households or company expansions leads to higher demand for space.
With fixed supply, rental prices also increase. If space usage is quite sensitive to rental prices (elastic demand), the demand curve is flatter. If the economy changes, the entire demand curve shifts. An upward shift occurs during economic growth, indicating higher space demand at the same rental price. Conversely, economic downturns cause the demand curve to shift downward, with opposite effects.
If we draw a vertical line from the point on the horizontal axis corresponding to the current available rental supply (Q*) to the demand function, it will show us the current equilibrium rental price, which is projected horizontally onto the vertical axis at point R*, representing the equilibrium rental price with the rental space supply Q* in the market.
Second Quadrant, Northwest Quadrant:
This quadrant illustrates the relationship between rental prices and sale prices (ownership/asset market quadrant). The diagonal line in this quadrant (emanating from the origin) represents the capitalization rate of real estate. This is the current yield that investors require to hold real estate assets. The factors determining the capitalization rate respond to changes in macroeconomic parameters.
A higher capitalization rate causes the diagonal line in this quadrant to rotate clockwise, and vice versa. The lower the capitalization rate, the higher the real estate transaction price for a given rental price. The steeper the diagonal line in this quadrant, the higher the capitalization rate (lower real estate prices per unit of rent).
By drawing a horizontal line from the current rental price R* on the vertical axis to the capitalization rate line in the northwest quadrant, and then drawing a vertical line from that point to the horizontal axis, we determine the price at point P*, representing the real estate price.
Third Quadrant, Southwest Quadrant:
This quadrant describes the activities of the real estate development sector – the process of real estate production, showing the relationship between real estate prices and the annual volume of construction activities (construction market). Real estate developers and builders here always respond to the relationship between price and the volume of products introduced into production. The lines in this quadrant relate to a certain real estate price and a specific construction rate.
The vertical axis (from the origin downwards) represents the construction volume; the deeper down the vertical axis, the greater the level of construction activities. The diagonal line representing the construction function in the southwest quadrant slopes downwards and outwards (sloping down and to the left), indicating that higher real estate prices will stimulate a larger volume of new buildings.
The leftward slope of this line depends on the marginal cost of providing new construction area; the smaller the marginal cost, the more vertical this line, and the more the changes in real estate prices will strongly impact the increase in supply, and vice versa.
The relationship line between price and construction volume usually starts at a point outside the origin at a positive value equivalent to the construction cost, indicating that when real estate prices are below a certain threshold, developers will stop building, and no new constructions will occur.
The downward line starting from the purchase-sale price at P* on the horizontal axis will intersect with the construction function at a corresponding point, and from that point projected onto the vertical axis (drawing a horizontal line through it), we will know the volume of new constructions on the market initiated by developers (point C*).
Fourth Quadrant, Southeast Quadrant:
This quadrant represents the relationship between the amount of construction output and the amount put into use or the annual new construction converted into real estate supply (product supply market). The diagonal line in this quadrant relates to the ratio of annual construction initiation area to the area available for rent each year and the inventory area in the production process or on the market.
Thus, in the long-term equilibrium, a certain amount of new construction each year is necessary to maintain an inventory of available rental space on the market. The larger the total inventory, the larger the annual construction rate needed to maintain this inventory in the long term (hence the downward-sloping line starting from the origin). The straight line in the southeast quadrant connects point C* (the amount of new construction) with point Q* (the total supply of rental space). The 4Q model thereby describes a stable long-term equilibrium state of the real estate market.
With the four quadrants—Northeast, Northwest, Southwest, and Southeast—the 4Q diagram completes a 360-degree analysis to study the long-term equilibrium state of the real estate system.
III. Application of the 4-Quarter Model in Analyzing Credit Policies for Real Estate
In recent years, the Vietnamese real estate market has been significantly affected by unfavorable global economic developments and domestic macroeconomic policies, especially monetary policies. The state of expansionary or contractionary monetary policies is closely related to the real estate market. The characteristic of the real estate market is that it involves high-value assets. Participants in the market’s supply and demand, from real estate developers, service businesses, to individual investors, all require financial support (loans from the capital market).
Therefore, when monetary policy is expansionary (accompanied by low interest rates), cheap capital costs will encourage capital flows into real estate investment and ownership, and vice versa. Credit policies are also considered part of monetary policy; credit expands when monetary policy expands, especially in economies where the structure, depth, and development level of the financial market are not yet developed like Vietnam.
However, sometimes monetary and credit policies are expansionary but control over real estate credit increases due to concerns about cross-risk between the real estate market and financial stability. This also tightens capital flows into the real estate market, reducing market growth momentum.
Real estate credit policies are usually regulated by the State Bank through regulations such as: the ceiling on real estate loans in the total outstanding loans of an institution, the ratio of short-term capital for medium and long-term loans, and the risk weighting for real estate credit (applied in calculating total risk-weighted assets when controlling the CAR index).
The impacts of credit policies on real estate can be identified according to the principles of DiPasquale and Wheaton’s 4-Quarter Model (1992). In each case, we can identify which quadrant is initially affected, follow the impacts through the other quadrants, and reach a new long-term equilibrium state. In this article, we describe the impact mechanism in two cases: (1) Interest rate reduction and (2) Real estate credit restriction.
- Interest Rate Reduction
As previously analyzed, if the demand for real estate ownership changes (ownership market), the spillover effects on other markets will differ significantly compared to when the demand for real estate usage changes (rental market). Several factors can cause changes in the demand for real estate ownership. If interest rates decrease, the current return on real estate will become higher compared to fixed-income securities, prompting investors to shift their capital into real estate.
The model assumes that the capital market efficiently adjusts the prices of specific assets. Therefore, a change in the demand for real estate ownership, as described above, will alter the capitalization rate at which investors are willing to hold real estate. Consequently, when interest rates decrease, it will initially affect the ownership and real estate trading sector. This will increase the demand for holding real estate assets.
Reducing interest rates on real estate will lower the returns that investors require from real estate. As shown in the diagram below, in the northwest quadrant, this has the effect of rotating the price relationship line counterclockwise (the ray always passing through the origin), thereby increasing real estate prices.
With rental prices in the real estate market, the reduction in yield or current capitalization rate for real estate increases asset prices, as depicted in the middle of the Southwest quadrant. As real estate prices rise, optimistic expectations about returns on real estate investment also increase.
Developers begin new constructions, and the demand in the real estate sector grows. Rising house prices lead households to increase spending and investment in real estate assets. Similarly, fluctuations in house prices significantly affect the financial behavior of households and future homebuyers.
When real estate prices rise significantly above construction costs, the profit margin encourages real estate investors to undertake new projects. Ultimately, this increases the supply of space (in the Southeast quadrant), which then reduces rental prices in the real estate market (Northeast quadrant).
If rental prices decrease while interest rates no longer drop, the money supply in the market is only temporary in the short term. For instance, after the COVID-19 period in Vietnam, the economy declined, deposit interest rates fell, and loan interest rates were low but only for a period.
Now, as the economy recovers, interest rates are gradually rising again. If interest rates do not continue to decrease, the diagonal line in the Northwest quadrant will revert to its original position. Consequently, with lower rental prices, sale prices also drop, and production volume subsequently decreases. The market loses balance in one quadrant, creating an immediate imbalance in the real estate market and a potential crisis.
If interest rates continue to decrease, they will eventually reach the initial price level, allowing the production volume to recover and reestablish demand equilibrium.
According to Resolution No. 33/NQ-CP dated March 11, 2023, the Government and the State Bank launched a 120 trillion VND credit program (approximately 12% of the capital needed to meet the goal of completing at least 1 million social housing units and worker housing units during 2021-2030).
This program provides loans to developers and homebuyers of social housing and worker housing projects at interest rates 1.5-2% lower than the average medium- and long-term loan interest rates in VND offered by state-owned commercial banks (including Agribank, BIDV, Vietcombank, Vietinbank) at different times.
Additionally, the State Bank coordinates with the Ministry of Construction and related ministries, agencies, and organizations to identify the project list, beneficiaries, conditions, and criteria for benefiting from the program.
Currently, in addition to the four state-owned commercial joint-stock banks (BIDV, Vietinbank, Agribank, Vietcombank), four more banks: Tiên Phong (TPBank), VPBank, MBBank, and TechcomBank have registered to participate in the program, with each bank committing 5 trillion VND (increasing the total support capital to 140 trillion VND). However, so far, the banks have only disbursed 1.344 trillion VND (less than 1%), including: 1.295 trillion VND for developers in 12 projects and 49 billion VND for homebuyers in 5 projects (Ministry of Construction, 2024).
Therefore, although real estate interest rates have decreased, besides procedural and conditional issues, the loan term is a critical consideration. If the loan term is sufficient for investment, construction, and sales, balance can be achieved. However, if the loan term is only 2-3 years and then floated on the market, it will lead to imbalance as analyzed.
Thus, using interest rates to stimulate the real estate market requires long-term, stable policies and interest rate packages. For example, real estate loans for low-income housing and social housing should have a loan term of 15 years to ensure that businesses can cycle through 1-2-3 investment cycles, thereby creating low prices.
If interest rates decrease steadily and remain low, with all other factors balanced, production will increase, leading to higher supply. It’s important to note that this scenario will always cause rental prices in the market to decrease, not increase, with the maximum rental price only reaching up to R*. If interest rates decrease unstably, it will result in sudden price spikes.
- Credit Restriction
Similarly, in the case of credit restriction for real estate or an increase in the economy’s interest rates, the demand for holding real estate assets will decrease. The price relationship line will slope upwards, rotating clockwise, thereby reducing real estate prices in the middle of the Southwest quadrant.
This reduction in prices leads to a contraction in construction, forcing developers to halt or reduce their projects. Consequently, the market supply will decrease, leading to increased rental prices, and continuing the cycle will ultimately cause sale prices to rise (provided the conditions of limited credit supply continue – resulting in ongoing supply scarcity).
Thus, restricting real estate loans or raising interest rates will immediately affect real estate buyers, limiting purchases and reducing real estate prices, thereby curbing speculation. If real estate credit restrictions continue, construction will decrease. However, the reduction in construction does not happen immediately with credit restriction; it takes time from the price drop for investors to restructure their projects.
During this period, new projects will naturally not be invested in. If this credit restriction policy continues for a prolonged period, it will lead to difficulties not only for homebuyers but also for businesses in securing capital to start new projects, causing an imbalance in the real estate market.
An example in Vietnam during the real estate credit tightening period from 2009 to 2013 (when real estate credit was categorized as high-risk assets by commercial banks, with a risk weight of 250%, and the non-productive credit ratio was reduced from 22% to 16%) resulted in an immediate heavy impact on the real estate market.
Conversely, if credit restriction policies are only in place for a short period to curb speculative behavior, they will not significantly impact the market and will not cause an imbalance in the real estate market.
IV. Conclusion and Recommendations
– Firstly, if encouraging real estate growth by lowering interest rates is only done for a short period, it will create an imbalance in the real estate market. To achieve balance in the real estate market, it is necessary to maintain low interest rates for a sufficiently long period for prices to increase, developers to return to production, and new products to enter the market, thereby restoring balance. Therefore, using preferential interest rate policies must have long-term impacts to create balance. Long-term, stable interest rate support policies can be implemented through the Social Policy Bank.
– Secondly, if using credit restriction policies or controlled interest rates, short-term impacts are necessary. Short-term impacts create market balance to limit unwanted speculation. If credit restrictions are maintained for a long period, they will impact the market imbalance in the real estate sector.
References
- Hoàng Văn Cường (2021), Real Estate Market Textbook, National Economics University Publishing House.
- DiPasquale, D. and W. C. Wheaton (1992), ‘The Markets for Real Estate and Space: A Conceptual Framework’, Journal of the American Real Estate and Urban Association, 20 (1), 181-197.
- Bộ Xây dựng (2024), Implementation status of Resolution 01/NQ-CP and socio-economic situation in the first 8 months of 2024, Hanoi.
- Chính phủ (2023), Resolution No. 33/NQ-CP on a number of solutions to remove obstacles and promote the safe, healthy and sustainable development of the real estate market, issued on March 11, 2023.
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