Tax reforms needed to curb real estate price hikes in Vietnam: association

By Vu Pham, Minh Hue
Tue, September 10, 2024 | 8:01 am GMT+7

Vietnam needs tax reforms to redress price hikes and several imbalances in the real estate sector that perpetuate supply monopolies and put housing beyond the reach of most people, industry insiders say.

According to the Vietnam Association of Realtors (VARS), housing prices are continuously reaching new highs, far exceeding income growth of a majority of the nation’s population.

Specifically, the price index for apartments in Hanoi and Ho Chi Minh City increased by 58% and 27% respectively in Q2/2024 compared to the same quarter in 2019.

The Nam An Khanh Urban Area in Hoai Duc district, Hanoi has numerous abandoned villas 15 years on. Photo by The Investor/Trong Hieu.

The Nam An Khanh Urban Area in Hoai Duc district, Hanoi has numerous abandoned villas 15 years on. Photo by The Investor/Trong Hieu.

With the increase in prices far above the rise in incomes, affordable commercial apartment projects have completely disappeared from urban areas.

Mid-range apartments are becoming increasingly scarce, too, overshadowed by high-end and luxury segments. More than 80% of new apartment supply in Hanoi and Ho Chi Minh City this year has been priced at VND50 million ($2,000) per square meter or more.

Many newly launched apartment projects are priced at tens of thousands of USD per sqm. The high primary prices of new apartments are driving up the prices of older apartments, with some that have been used for decades being offered at prices two to three times higher than the original.

The association notes that the surge in apartment prices has led to a rise in the prices of land-attached houses, including villas and townhouses. This trend has spread to projects in districts and towns far from city centers. In the past, villas priced at hundreds of millions of VND per sqm were relatively rare, but it is common now to see those listed at up to VND1 billion ($40,500) per sqm.

The prices of land plots have also been rising, with some provinces and cities experiencing localized "fevers" due to resumed investment activity or supply-demand manipulations. In some places like the northern province of Hai Duong, prices have surpassed peak levels seen in 2022.

In the short term, the VARS assesses that primary housing prices, especially for apartments – which form the main supply for housing needs in urban areas – are unlikely to decrease. Amid continually increasing demand for real estate, particularly for investment purposes, developers will prioritize high-end segments to maximize profits when available land is becoming scarcer, construction costs are rising, and infrastructure and amenities are becoming more sophisticated.

Perpetuating supply monopolies

The new legal framework eliminates financially weaker developers, forcing the remaining developers to build large-scale urban areas with comprehensive infrastructure and amenities. This will push up costs, making it difficult for housing prices to fall.

Additionally, the market being dominated by financially strong and capable developers or those with land acquisition advantages will perpetuate supply monopolies. Major developers will continue to set higher market prices to maximize profits.

According to the VARS, the concepts of speculation and investment in Vietnam cannot be clearly differentiated at this time. Buying property for use, rent or transfer is legal and aligns with market rules.

However, uncontrolled trading is a major cause of real estate speculation across many localities nationwide, posing risks to the real estate market and the economy as a whole.

Speculators often “hoard” properties when they are scarce, either waiting for prices to rise or creating virtual shortages to drive up prices for higher profits. This phenomenon is very common in both urban and rural areas, impacting land fund development, supply-demand and the economy in the long term, since land is a critical input for most industries today.

To develop the market safely, sustainably and to ensure that land price movement happens in accordance with market rules, the VARS suggests that the government urgently implements an effective real estate tax policy.

Real estate taxation should also be transparent, targeting those who accumulate and speculate, rather than those purchasing property for living or business purposes. This approach would not only boost state revenue but also help regulate the real estate market, aligning with global trends.

The association proposes that taxes be imposed on second homes and beyond. It is natural that wealthier individuals pay more taxes if they have multiple income-generating assets. In fact, most recent homebuyers have purchased second or third homes.

For example, in Singapore, anyone buying a second home pays a 20% tax on its value, and 30% for a third home.

Progressive taxation examples

Tax rates could increase progressively based on the holding period of the property. In Singapore, selling a property within the first year incurs a 6% tax, 8% in the second year, 4% in the third year, and no tax after four years. Similarly, in South Korea, land left unused or under development for over two years faces a 5% tax, which increases to 8% after five years, 9% after seven years, and 10% after 10 years. In the U.S., vacant land is taxed at 3%.

The VARS says that such a tax policy would reduce or eliminate incentives for speculation, curbing housing price hikes. Alongside interest costs and other opportunity costs, speculative property ownership would become riskier. Buying and selling properties for profit or creating virtual supply-demand would become a less viable proposition.

Moreover, this policy would encourage owners of "vacant" properties to rent or sell, thus improving access to housing for those with real needs. If tax imposition still leads to speculative activity, the revenue generated thus could support public investment and construction of schools, hospitals, roads and other needed works.

Taxation challenges

However, using taxation to regulate the market presents its own challenges, including significant investment in technology and human resources.

The VARS stresses that effective and transparent taxation requires building and refining housing and real estate market information systems and databases to identify second, third, and additional homes and their taxable value.

The government must also consider potential negative impacts like reduced purchasing power that can have long-term economic consequences; legal loopholes that allow the wealthy to evade taxes by transferring ownership to relatives; and increasing rents to offset tax costs, the VARS cautions.

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