MITIGATING THE RISKS OF LAND PRICE TABLES TO THE REAL ESTATE MARKET 2025
MITIGATING THE RISKS OF LAND PRICE TABLES TO THE REAL ESTATE MARKET
Dr. Pham Thanh Đat
Institute of Banking and Finance – National Economics University
Abstract: The revised Law on Land, recently approved by the National Assembly, officially takes effect from August 1, 2024. This Law has addressed most of the deficiencies, limitations, and lack of transparency in determining land prices not close to market value, creating loopholes for misconduct and causing budget losses for the State over the years.
Eliminating the land price framework and issuing the Land Price Table is a new point that impacts most fields and subjects in the economy. As this is a new issue, there needs to be research and discussion to fully understand the effects of the land price table on the economy. This paper focuses on discussing the impacts of the land price table on the real estate market’s activities and proposes some solutions to mitigate the arising risks.
Keywords: Land Price Table, Land Law 2024, Real Estate Market, Impact of Land Price Table
Introduction
The real estate market is a unique market, but like other markets such as the gold market and the stock market, it constantly moves and changes. If the price of goods is limited within a price framework, the price of goods may become outdated and significantly lower than the actual transaction price in the market, especially in major cities. The real estate market is also an important market in the economy, as it directly relates to a large amount of assets in terms of scale, nature, and value in the national economy.
The policy to eliminate the land price framework and establish mechanisms and methods for determining land prices according to market principles is a “breakthrough new point” in the revised Land Law 2024. The issue raised in the current context is how to establish an objective, effective, and feasible land price table. Additionally, what are the risks that the land price table poses to the activities of the real estate market? This paper focuses on analyzing the impacts of the land price table on the development of the Vietnamese real estate market, thereby proposing policy solutions to effectively manage the market while minimizing risks for its participants.
I. What is the Land Price Table?
The 2024 Law on Land has abolished the “land price framework” and introduced the “land price table.” Accordingly, the “land price table” is constructed annually, with the “first land price table” being announced and implemented from January 1, 2026. The new price table will not be constrained by the land price framework, and localities are required to develop land price tables that approach market values.
Article 159 of the revised Land Law stipulates the Land Price Table, which applies to the following cases:
– Calculating land use fees when the State recognizes the residential land use rights of households and individuals; changing the land use purpose of households and individuals;
– Calculating land rent when the State leases land with annual rental payments, except for cases of land lease through land use rights auction;
– Calculating land use tax, and calculating income tax from the transfer of land use rights for households and individuals;
– Calculating fees in land management and use;
– Calculating fines for administrative violations in the field of land;
– Calculating compensation to the State when causing damage in land management and use;
– Calculating land use fees and land rent when recognizing land use rights with land use fee payments, and land rent paid once for the entire lease period for households and individuals;
– Calculating the starting price for the auction of land use rights when the State allocates or leases land for plots or areas that have been invested in technical infrastructure according to the detailed construction planning;
– Calculating land use fees for cases of land allocation without auctioning land use rights for households and individuals;
– Calculating land use fees for cases of selling state-owned houses to current tenants.
II. The Impacts of the Land Price Table on the Real Estate Market
1. Impact of the Land Price Table on Real Estate Market Prices
The land price table directly affects real estate market prices, particularly when the land price table increases, causing housing prices to also trend upwards. The land price table is constructed based on land use purposes, land use durations, input factors, and other elements influencing land value. When the new land price table is closer to market prices, related budgets such as site clearance costs, land compensation, and related taxes and fees tend to increase.
Real estate market prices are formed according to the law of value, the law of competition, supply-demand relationships, and are influenced by market psychology, including herd mentality. Therefore, market prices are always volatile and unpredictable.
Housing prices consist of many components, among which the cost of fulfilling financial obligations related to land with the State plays a crucial role. Land use fees account for about 10% of the cost of an apartment, about 30% of the cost of a townhouse, and about 50% of the cost of a villa. An increase in the land price table will lead to higher housing prices, making it more challenging for individuals with average and low incomes to afford housing.
Real estate, with its high value, when increasing in price, will lead to a higher demand for credit to meet the purchasing needs of real estate. Interest rates will become an important factor for both buyers and real estate providers. Real estate developers and related businesses, and even the State, need to mobilize substantial capital to produce products. Consumers often need to take out large loans to purchase real estate.
If interest rates rise higher than the economic growth rate and average GDP, a mismatch between supply and demand in the real estate market will occur. This mismatch will make real estate prices more complicated, harder to predict, and increase market risks.
2. Impact of the Land Price Table on Real Estate Market Transaction Scale
The land price table has a direct impact on the transaction scale in the real estate market.
First, the land price table affects the confidence of market participants. The construction of an objective, effective, and feasible land price table will help increase the confidence of participating parties. This is a decisive factor for market demand and real estate prices. When positive confidence prevails, consumer spending and investment will increase, subsequently raising the demand for real estate.
Additionally, the increase in consumption stimulates investment and economic activities, creating more jobs and forming an upward spiral. However, when the land price table increases, land and housing prices also rise, which may reduce the overall effective demand. Some customers will no longer have sufficient financial capacity to purchase homes, leading to a potential decrease in the transaction scale of the real estate market.
As a result, this decline will primarily affect the high-end real estate segment, condotels, and reduce the scale of the secondary investment market, which is currently very “hot”.
3. Impact of the Land Price Table on the Investment Environment
If the land price table is set too high, it will significantly push up real estate market prices, particularly for land prices in the primary market projects. When land prices increase, input capital costs also rise, directly affecting investment efficiency and project implementation efficiency. Excessively high input costs can “strangle” the investment motivation of enterprises. Businesses and investors will no longer be motivated to carry out projects when costs become too substantial.
The profit equation for businesses will become extremely challenging, as high land prices and increased input costs make issues such as selling prices, profits, and output major challenges. This not only affects domestic investors but also negatively impacts foreign investors and the investment environment in general. High land prices will reduce the attractiveness of the investment environment, especially for foreign enterprises, regardless of the economic sector they operate in.
Therefore, a decrease in FDI attraction may occur. Even if FDI is attracted, it is difficult to assess whether it is healthy FDI and will be long-term committed to the national economy.
III. How to Mitigate Risks?
Based on the general approaches mentioned above, and taking into account common practices in other countries, the author suggests and proposes several specific solutions for consideration by the competent authorities. These include:
- Role of the Land Price Table:
The land price table plays a crucial role in creating market transparency and balancing supply and demand, as land prices closely follow market reality. This promotes transactions in the real estate market. However, ensuring a balance of interests among the State, investors, and the public in land management according to Central Resolution 18 will be very challenging. The majority of the public’s benefits may not be guaranteed when land prices and housing prices increase.
As land and housing prices increase, the State’s policies will have a significant impact on the real estate market. Besides monetary tools like interest rates, other policies include taxation, subsidies, infrastructure investment, and planning. State subsidies for low-cost housing segments or housing for low-income families will boost both supply and demand, making the real estate market more vibrant. The value of real estate will change depending on the correlation between supply and demand.
For tax policies, their impact on the market and real estate values can have two contrasting outcomes. If the State applies taxes and uses tax revenue for activities unrelated to real estate, such as subsidies for disadvantaged regions, this may negatively affect the real estate market. Transaction volumes will decrease, real estate prices may increase, but sellers’ profits will be lower, and buyers will have to pay higher prices.
Conversely, if the State uses taxes to provide public utilities like education or maintain shared infrastructure, the impact is generally more positive on real estate values and market activities. This has been clearly demonstrated in developed countries, especially in the USA.
- Establishing Databases and Information Centers:
Establishing official, specific, transparent, and easily accessible databases and information centers for the public regarding policy directions, development planning, including land use planning and plans, along with accountability for any amendments, if any.
- Facilitating Professional Service Provision:
Creating conditions for the formation and provision of professional services with accountability mechanisms for intermediary organizations in land-related transactions, including consulting, valuation, notary, and legal services.
According to the experience of other countries, all real estate transactions are free (not mandatory through exchanges); however, the participation of intermediary institutions is mandatory to ensure legal safety and information transparency.
- Identifying Market Principles:
Recognizing the principle of adhering to market prices is correct; however, it needs to be thought through more clearly. In reality, the dual pricing mechanism, which includes “State price” (set by state agencies) and “market price” (established from voluntary transactions by citizens), is objectively necessary.
Even when closely following the market, the State price always has a certain delay and deviation due to the diversity and flexibility of development and people’s living needs. The key issue is clarifying the purpose of the State issuing the land price table.
- Supplementing Market Regulation Mechanisms:
The Real Estate Business Law 2023 and Decree 96/2024 have supplemented the real estate market regulation mechanisms, clearly outlining the role of each relevant agency.
Accordingly, real estate market regulation measures are implemented when the transaction price index increases or decreases by more than 20% within three months or when there are other market fluctuations affecting socio-economic stability. However, the questions of who regulates, with which tools, and with what resources still need to be answered.
- Rapid Institutional Improvement:
There is a need to quickly complete the institutional framework, including amending the Law on Land, the Law on Housing, the Law on Real Estate Business, the Law on Credit Institution Law, the Law on Securities, etc. Proposals should be made to continue implementing Decree 65/2022/NĐ-CP from early 2024.
Regulations should be established to categorize real estate segments for appropriate credit, capital, and financial policies. Guidance and permission for the establishment of specialized real estate financial institutions (housing savings funds, REITs, Mortgage Refinance Agency, real estate securitization) should be provided, along with building a suitable real estate tax roadmap. Encouraging cashless payments for real estate transactions is also essential.
For real estate businesses, they should, from now on, build and complete specific, feasible plans to repay maturing corporate bonds (especially in 2024).
They should diversify their capital sources (besides bank credit, including bond issuance, shares, investment funds, financial leasing, etc.), mobilize capital tied to specific use purposes, reduce financial leverage, limit widespread investment, and aim for transparency and professionalism, especially in tax records, credit records, securities issuance records, and fulfilling commitments.
They should also focus on managing financial risks (interest rates, exchange rates, cash flow, financial leverage, etc.).
IV. Conclusion
As one of the most anticipated changes in the revised Law on Land, the provision to abolish the government’s five-year land price framework and use annual land price tables means that land prices will be determined according to specific cases based on market principles.
Although the impacts of the land price table need to be practically verified, the application of various land valuation methods (the author highly appreciates the residual method for its estimation of future land use value and its use in many developed countries) and aligning the state’s land prices with the market will help ensure a harmonious balance of interests among parties during negotiations, thereby limiting disputes, increasing the confidence of market participants, and aiding the sustainable development of the nascent real estate market in Vietnam.
References
– The Law on Land No: 31/2024/QH15, dated January 18, 2024;
– The Civil Code No: 91/2015/QH13, dated November 24, 2015;
– The Investment Law No: 61/2020/QH14, dated June 17, 2020;
– Central Economic Commission (2022), Proceedings of the National Scientific Conference: “Sustainable Development of the Real Estate Market in the New Context”, National University Publishing House, Ho Chi Minh City;
– Ân, Đ. V. (2011), “Real Estate Market Development Policy in Vietnam”, Political Publishing House;
– Trà Giang (2024), “New Laws Will Strongly Impact the Real Estate Market”, accessed from https://dttc.sggp.org.vn/cac-luat-moi-se-tac-dong-manh-den-thi-truong-bat-dong-san-post113595.html.
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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”
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