Vietnam should tax properties not used by owners to combat speculation: expert

By Nguyen Van Dinh

Fri, April 19, 2024 | 8:18 am GMT+7

Major cities have become completely void of low-cost apartments, making it increasingly unattainable for migrant workers to settle; therefore, property tax policies should be adopted to dampen speculation, writes Nguyen Van Dinh, a real estate legal consultant and former Construction Ministry officer.

According to property service firm CBRE, the average selling price of apartments in Hanoi has reached VND56 million ($2,214) per square meter, excluding value-added tax and maintenance costs. Apartment prices saw a sharp rise in Q1/2024, especially after the Lunar New Year holiday, while prices of secondary apartments surged by an average of 17% over the year.

Even real estate brokers, traditionally regarded as the “culprits” behind inflated prices, are taken aback by the recent surges. Despite significant spikes in apartment prices specifically and house and land prices overall, it is primarily the asking price that has soared. Meanwhile, actual transaction volumes showed a minimal increase.

Real estate owners, including secondary investors, often adopt a defensive stance, holding on to projects with the belief that prices will continue to jump. This trend has indirectly contributed to the formation of a real estate bubble. Some experts predict that this bubble will burst soon, possibly by the end of this year.

Given that context, there is a rising thirst for social and affordable housing products in the market. In Hanoi, the majority of new developments cater to the high-end segment, with selling prices ranging from VND60-120 million ($2,372-$4,745)/sqm. This trend in the real estate market appears to contradict the principles of a market economy, and the widening gap between supply and demand is becoming increasingly concerning.

The 2023 market report by the Vietnam Association of Realtors (VARS) indicated an increasingly unbalanced structure in real estate products. The market is lacking budget-friendly options, with the proportion of affordable apartments within the total supply declining rapidly from 30% in 2019 to just 6% in 2023.

Furthermore, mid-end apartments are in short supply, particularly in Hanoi and Ho Chi Minh City. Apartments priced at VND40 million ($1,582)/sqm are predominantly available in their neighboring provinces, such as Binh Duong and Dong Nai in the south, and Bac Giang and Bac Ninh in the north.

According to a report by the Ho Chi Minh City Real Estate Association (HoREA), low-cost apartments, priced below VND25 million ($988)/sqm, have been entirely absent from the local market for the past three years. Mid-end apartments, priced at VND25-40 million/sqm, account for about 30% of the market, while the high-end ones, priced over VND40 million ($1,582)/sqm, represent 70-80%.

Apartments priced under VND40 million/sqm have vanished from both Hanoi and Ho Chi Minh City, making the dream of settling down increasingly out of reach for migrant workers. According to statistics compiled at the end of 2022 by Prof. Dang Hung Vo, who was a deputy minister of Natural Resources and Environment, Vietnamese people would need to work 100-120 years on average to afford a home in these cities, given the current income levels and housing prices. In contrast, in Thailand, it may take individuals around 28 years of work to purchase a city dwelling.

In recent years, public attention has been drawn to the growing supply and demand imbalance in the housing market. While high-end apartments continue to dominate the market, there is a notable shortage of budget options, which align more closely with the preferences of general homebuyers.

The statistics appear to contradict fundamental principles of the market economy, including those related to supply and demand, competition, and prices. The supply and demand disparity is causing serious imbalance and posing numerous potential risks to the market.

Recently, the government has issued multiple resolutions, directives, and dispatches aimed at addressing market problems, particularly by promoting social and affordable housing. It has launched a VND120 trillion ($4.7 billion) credit package, with a focus on the social and workers’ housing segment. However, progress remains sluggish.

In the current context, there have been recent proposals incorporating the concept of the “visible hand.” For example, there have been calls and lobbying efforts directed at businesses to proactively restructure housing products, prioritize on-demand offerings, and tailor prices to people’s incomes.

So why does the supply and demand imbalance persist and even worsen?

According to the law of supply and demand, if customer demand is primarily focused on budget apartments, businesses should concentrate on developing this segment to cater to the majority of buyers instead of targeting a minority of purchasers for high-end apartments.

This paradox arises as a direct result of real estate speculation and hoarding, driven by the mindset that nothing is more valuable than trading land. Additionally, real estate investors consistently receive substantial support from banks.

Real estate investors are regarded as VIP customers within the banking industry due to their reliance on mortgage loans secured by property, which is legally considered solid collateral. Furthermore, properties tend to appreciate in value over time, minimizing risks.

The legitimate need for investment by individuals is acknowledged, but when it reaches excessive levels, it transforms into speculation and hoarding. Consequently, this distorts the market, leads to land fallow, and causes the wastage of resources.

Another important reason lies in legal constraints, which have limited the number of projects eligible for implementation and sale.

Complaints about price-inflating tactics employed by real estate brokers and speculators are on the rise, and some people label such practices as akin to a “circus” trick with house and land prices. Certain news agencies and newspapers, following surveys and data collection, have advised against depositing money at this time to prevent falling victim to a virtual land fever.

In the end, amid an increasingly serious supply and demand imbalance, owners of houses and land naturally have the right to raise prices. Methods of inflating real estate prices, whether legal or illegal, will inevitably emerge as a phenomenon. Can brokers and speculators still manipulate house and land prices if the supply meets people’s needs?

Consequently, there is a growing anticipation for the amended Land Law, Housing Law, Real Estate Business Law, and their accompanying guidelines, aimed at eradicating legal bottlenecks. These changes are expected to enhance synchronization and transparency within the real estate legal framework, thus smoothing project implementation and balancing supply and demand.

Naturally, people owning properties ought to reduce their expected profits and focus on in-demand products. As a result, housing prices will decrease, and the gap between supply and demand will gradually narrow.

Another solution that should be implemented soon is taxing real estate to combat speculation. Recently, HCMC proposed taxing properties not directly used by their owners on a trial basis, but it was then removed from the National Assembly’s resolution on piloting special institutions for the city.

In the long term, taxing real estate that owners do not directly use is both necessary and practical, in line with the clear legal and political basis. Resolution 18, issued by the Party in June 2022, outlines the imperative of refining institutions to include provisions for higher tax rates on individuals who hold large land areas, own numerous houses, speculate on land, exhibit slow land utilization, or abandon land.

Without a taxation strategy to deter speculation, the supply will continue to primarily cater to investors’ preferences rather than addressing genuine needs. Until then, the market will still be driven by circus tricks surrounding house and land prices.