To address issues in the real estate market and meet public demand, comprehensive solutions from both government and businesses are needed. Most importantly, these solutions should be market-oriented so that everyone benefits.

Shifting perspectives

In a conversation with Nguyen Van Dinh, Chairman of the Vietnam Association of Realtors (VARS), it became clear that his views on taxing real estate had evolved.

Recently, VARS proposed an impactful idea: to urgently impose taxes on owning multiple properties to curb speculation and regulate the market. This proposal, similar to one from the Ministry of Construction, sparked intense debate. Many believed such a tax would drive down property prices, especially in Hanoi and Ho Chi Minh City, where prices have skyrocketed beyond reach.

I asked Dinh, “Do you truly believe a real estate tax will lower property prices and make housing more accessible?” He clarified that if someone owns multiple properties that are rented out for public purposes like schools, clinics, or retail, they shouldn’t be taxed.

“If we misunderstand and rigidly apply a tax on second homes, it will have unforeseen consequences, reducing immediate demand and potentially stalling the market's recovery,” he explained.

He added, “This could halt the nascent recovery of the market, plunging it back into difficulties, affecting numerous sectors and the broader economy, as we’ve witnessed over the past period.”

Does tax really lower prices?

From ancient times, taxes on goods and services have generally led to price increases, with consumers ultimately paying more. Taxing real estate is unlikely to reduce prices but could, in fact, push them higher.

Applying a tax on second properties might reduce buyer interest, shrinking demand. Real estate firms would then focus on building units that can be sold quickly to maintain cash flow, limiting the market’s diversity.

This could lead to a market slowdown, impacting banks and nearly 50 related industries. Farmers in rural areas might also feel indirect effects.

Moreover, as land in Vietnam is state-owned, taxed only under usage rights, applying real estate taxes raises significant theoretical challenges.

Economist Dinh Tuan Minh notes, “Citizens do not own land but hold usage rights, which the state can reclaim at varying prices.” This means taxing what is technically a usage right rather than ownership creates theoretical contradictions.

Why property prices soar

The surging property prices, especially in Hanoi and Ho Chi Minh City, are alarming. Key factors include:

- The 2022 Resolution 18-NQ/TW removed price ceilings and mandated market-based pricing for land, leading to significantly higher valuations.

- Compensation for land is supposed to reflect market rates, but “market rates” are often peak, speculative prices, pushing valuations higher under the new Land Law.

- Auction rules favor the highest bidder, often sidelining genuine buyers.

- Legal hurdles impede project supply, with regulatory issues accounting for 70% of real estate challenges. This has led to a wave of dissolutions and bankruptcies among real estate companies.

- Limited new projects and slow valuation processes have stalled many projects, further tightening supply.

Additionally, cultural tendencies to invest in land, deep-rooted for thousands of years and reinforced by gaps in social safety nets, exacerbate speculative behavior.

Both the government and real estate firms need substantial revenue for expenses, loan repayments, shareholder profits, and operational costs - all costs passed on to buyers.

A range of factors has driven up real estate prices in Vietnam, particularly in major cities. While the market faces substantial challenges, including liquidity and debt risks, urban migration and housing demand continue to rise.

Comprehensive, market-aligned solutions are essential for sustainable, balanced growth in the real estate market.

Tu Giang