Recent proposals in several cities to increase land prices, together with the current restrictions placed on new projects by local authorities, are expected to cause headaches for real estate developers.
Taking a seat on her regular bus service, 42-year-old Nguyen Thi Hoang prepared for another hour-long trip from her employer’s Ho Chi Minh City office to her home in Thu Duc, 12km away.
Hoang told VIR that she accepts the long trip every day because her family can only afford an apartment in Thu Duc district at a price of VND1.2 billion ($51,000) after she and her husband saved part of the sum and received the remainder from her mother-in-law.
Hoang’s case is common in sprawling cities like Ho Chi Minh City and Hanoi – it takes the same time at rush hour in the capital to take a bus from the city centre to locations such as Hadong. However, she was luckier than many other people who missed the chance to buy an apartment at that price.
“With our salary we cannot afford accommodation in the city centre even after years of working. So the only option was to seek for help from relatives,” Hoang said.
Putting further strain on young families into next year, the new land price bracket for the 2020-2024 period proposed by many cities and provinces show a very high average increase, in some places by up to 95 per cent.
The land price list is developed every five years, applied to calculate land use fees, charges in land management and land use, fines for administrative violations in real estate, compensation, land use value, and more.
Accordingly, Hanoi People’s Committee proposed that a new land price level with an average growth minimum from 15 per cent will be applied from 2020 for five years, for all types of land from urban living land to commercial and services land in urban areas. Rates of popular areas are expected to be increased by 30 per cent.
Meanwhile, Ho Chi Minh City is also considering three options for bumping up land prices. The first is keeping the minimum price unchanged and doubling the maximum price compared to the current price; second is keeping the minimum price unchanged and increasing by around half the maximum price compared to current rates; the third is maintaining the minimum price and increasing the maximum by a third. The solution has yet to be chosen; however some experts said that the second option was the most reasonable.
In the southern province of Binh Duong, local authorities have just announced a draft decision on land price for 2020 and beyond with an increase from 45 to 95 per cent over the current price.
Land use fee accounts for approximately 10 per cent of the cost of apartments; around 30 per cent of town house prices, and approximately 50 per cent of villa prices. The price is the basis for the investor to decide the selling price of housing products to the market. Therefore, the increase in land price directly impacts housing prices, which makes it more difficult for middle-income and low-income urban people to buy houses.
Investors and buyers worry
Many property developers have showed concerns about the price rise proposals.
One representative from a property company said, “When the new price is applied to the market, developers and buyers could be shocked. Before deciding to invest in a certain project, developers clearly study all expenses and based on these expenses to set up the product’s price. But now if the land price increases many times over, how will they afford it?”
Ngo Duc Son, deputy general director of DRH Holdings, said that with the regular five-year price change, a growth rate of 40-50 per cent is normal. “However, this will force investors to rush towards grabbing a land-right certificate and finish all related dossiers before the price changes. And that mission has always been very difficult for them,” Son said, adding that price rises would increase all other related expenses, and these will together push up the price of accommodation. “This is really a challenge for investors,” he said.
Conversely, Nguyen Chi Thanh, deputy chairman of the Vietnam Realtors Association, said that the situation will become more transparent, creating favoured conditions for land clearance and compensation, and encouraging land users to turn their land from agricultural to urban or industrial land, thereby helping increase the land fund for further developments. “With the current situation, in the coming time the supply of accommodation in the big cities will continuously reduce. New launched projects will be reset at a much higher price and this will further limit the opportunity for buyers to purchase accommodation in urban areas,” Thanh cited.
According to Lam Pham, CEO at DKRA Vietnam, with an average income of $6,400 per year, a person living in Ho Chi Minh City would take 20 years to save enough to purchase a VND1.5 billion ($65,000) flat. “House prices have been increasing faster than the average income, meaning the dream of owning a house in the city is becoming tougher, even for young people on a strong salary of tens of millions of VND per month,” said Lam.
According to DKRA’s survey, in a diameter of 10km from Ho Chi Minh City centre, very few projects are sold at less than VND1.8 billion ($78,250) per unit except from those with poorer transport access. Average prices currently range from VND2.6-3 billion ($113,000-$130,400) per unit while high-end units are sold at around VND5 billion ($217,400) per unit.
According to Bloomberg’s Global Housing Index in 2018, with an average income of $275 per month, a Hanoian will have to pay a 2.6 times of his income to rent a three-bedroom unit and four times the income to pay the credit instalments for a 90-square-metre unit per month.
Dung Duong Senior director CBRE Vietnam
The most impact would be imposed on residential development projects. Price increases will force developers to up sale prices to buyers.
Villas and detached houses would increase the most – perhaps from 30 to 40 per cent; the price of flats will also rise; and commercial and industrial project land price increase will also up rents.
For mid-size and affordable projects, developers cannot increase prices too much as payment affordability of buyers is limited. They may have to adjust the quality of products and reduce facilities in order to ensure profits.
With the real estate market now being bogged down with the slow process of licensing, the price increase will give developers more difficulties in implementing their projects. The market may fall into frozen status in areas in which the price has risen sharply.
Ngo Quang Phuc - General director Phu Dong Group
In order to break away from the current situation, the Vietnamese government should map out special areas in order to develop affordable housing in the country, especially for young people who are increasingly in higher need of accommodation.
A limited supply, tied in together with very high demand, causes many complicated issues across the country. These problems could impact the whole economy, not just the real estate market in Vietnam.
The price of homes in Ho Chi Minh City in particular has been increasing and this is something to keep an eye on. It will, for sure, keep absorption at low rate because buyers cannot afford; meanwhile due to the increase of the land price, developers have to build high-end projects in order to sell them at a higher price.
This makes the dream of low incomers in Vietnam owning a home more difficult to reach.
Nguyen Thanh Ha - Lawyer SBLaw
The Law on Land 2013 had stated the renewal of land prices every five years, instead of every year as previously.
The price set by local authorities has increased much during recent years; however it is still far behind the real prices in the market. The fast increase however will make implementation of property projects become harder. Thus the all fees for infrastructure facilities inside a project, compensation, and clearing of land also absolutely rise.
Meanwhile, credit for the real estate sector has been tightened by the State Bank of Vietnam. All of these factors discourage property developers because their investments would suffer from ineffective business.
Moreover, the current prices of houses are too high compared to the income that people take home, and it makes it more difficult for them to have a house in the future. VIR
Despite facing difficulties and challenges, the Vietnamese real estate market is developing stably, positively, and professionally.
Due to tax violations, real estate giant Lideco has been fined for VND2.3 billion ($100,000).