HOREA has sent a document to the Prime Minister clarifying the problems related to real estate market structuring and housing prices. In the document, the association cited reasons why real estate firms are not lowering selling prices, though they are running out of money.

In fact, some realtors have recently reduced selling prices, but the reductions were small. Realtors cannot slash prices sharply because if they do, they won’t be able to cover increasingly high expenses on input materials, their labor force, and capital and management costs.

Of these, the land bank creation cost alone has many expenses, from compensation for site clearance and land use fee to land rent and rice-farming land protection fees (if their projects use rice-farming land). The cost alone accounts for 15 percent of the costs of apartment development, 30 percent of townhouse projects, and 20 percent of villas.

Around 70 percent of real expenses are accepted as costs and they are deductible when calculating corporate income tax, while the remaining 30 percent are considered taxable income. The current corporate income tax rate in the real estate sector is 20 percent.

All these kinds of expenses are counted when calculating selling prices.

According to HOREA, realtors have been criticized for selling housing products at sky-high prices and making fat profits, but in fact, the prices are high because of many kinds of fees realtors have to pay.

On average, construction costs account for 50 percent of production costs in apartment projects, 30 percent in townhouses, and 20 percent in villa projects. 

The prices of building materials, including steel, sand and cement, have been increasing rapidly in recent years. The steel prices, for example, have surged by 30 percent. Meanwhile, input materials account 65-70 percent of total costs of construction work.

Previously, the construction cost was just VND7-8 million per square meter of construction floor area, but the figure has surged by twofold to VND12-13 million.

Meanwhile, financial costs, which comprise bank loan interest and capital mobilization cost, is also high, accounting for 10 percent of total costs. Moreover, the management cost is equal to 5 percent of total costs.

If the construction duration is prolonged because of legal problems as seen in recent years, the total costs are much higher, leading to a housing supply shortage, especially affordable housing.

In the document to the Prime Minister, HOREA pointed out that realtors also have to pay additional kinds of fees which are not found in legal documents. The fees are rejected by taxation bodies when calculating corporate income tax, but they are counted by realtors when defining selling prices. This also pushes housing prices up.

Bottlenecks in laws

The association also said that legal problems have caused a housing supply shortage.

Because of legal problems, realtors cannot develop projects as initially scheduled and have had to spend more money to settle the problems. As a result, they raised selling prices to avoid losses.

In large cities such as Hanoi and HCM City, new affordable housing is not available. HOREA commented that the administrative procedures for social housing are even more complicated than those for private housing projects.

A senior executive of a real estate firm said the firm is stuck because of a project which cannot go ahead in HCM City. Because of the problems, the firm doesn’t have new products to sell, though demand is high.

“We want to cut selling prices to boost sales, but it is impossible,” he said adding that the costs to implement real estate projects is increasingly high.

He said that the current situation of the real estate market can only improve if legal problems are solved. Once supply increases, the prices will fall.

Hong Khanh