The Ministry of Construction (MoC) recently submitted Report No. 5333 to the Office of the Government, analyzing the structure of housing costs and sales prices and the causes behind rising real estate prices while also proposing solutions. Housing prices, the ministry reported, are primarily made up of seven key cost components, including land use fees, site clearance and compensation costs, construction expenses, infrastructure costs within project areas, loan interest during construction, investor management costs (including the desire to post profits), and sales costs and related taxes and fees.

Reasons for rising prices

The MoC also listed four main reasons driving real estate prices upwards.

First, rising land-related costs have been a significant factor, especially as local authorities adopt new land pricing methods and updated land price tables. These adjustments include various expenses like land use fees, land lease costs, compensation for land and structures, and relocation costs. Such land-related expenses now represent a substantial portion of total project costs, ranging from 7-20 per cent for high-rise apartment projects and 25-50 per cent for villa and adjacent housing developments.

The amended Land Law 2024 abolished the old land price framework, replacing it with a more market-aligned approach, which has further driven up associated costs such as site clearance and compensation as well as taxes. The MoC estimates that land use costs will rise significantly under the new 2024 pricing structure, causing real estate prices to rise 15-20 per cent across several projects.

Second, speculative price inflation by real estate investors and freelance brokers has also had an effect. Many of these brokers lack sufficient legal knowledge, professionalism, and ethical standards, often inflating prices beyond actual values for personal gain. This behavior negatively impacts market transparency, and it is not uncommon for brokers to add 5-20 per cent to property prices, depending on market demand. Real estate prices are being driven upwards not only in the primary market but also in the secondary market, due to brokerage and intermediary activities. Typically, homeowners are required to pay 1 per cent of the total sale price to the broker, but during “heated” market conditions, brokers often inflate the price when dealing with customers.

Third, the ongoing housing supply shortage, particularly in affordable housing, is another critical factor. This shortage disproportionately affects low and middle-income urban residents. Legal and financial difficulties have delayed or stalled many projects, leading investors to capitalize on limited supply by setting higher prices in regions with fewer available developments. Certain investors exploit this situation by setting excessively high prices to earn substantial profits, particularly in areas where there is only one or very few projects available. Following the enactment of the amended Land Law 2024, the amended Law on Housing 2023, and the amended Law on Real Estate Business 2023, institutional and regulatory challenges for businesses have been addressed, resolving many of the shortcomings in previous laws. However, it will take time for new mechanisms, policies, and laws to be fully implemented, leading to ongoing supply shortages in the interim.

Lastly, broader economic fluctuations in stock, bond, and gold markets have impacted investor sentiment, leading to a shift in capital towards real estate as a safe investment option, driving up both transaction volumes and property prices.

Measures to limit speculation

Based on its analysis, the MoC outlined several measures and assigned responsibility to relevant ministries and agencies aimed at bringing down real estate prices and stabilizing the market. One key proposal is for the MoC to work with the Ministry of Natural Resources and Environment (MoNRE) and other agencies to develop a pilot model for “State-managed Real Estate and Land Use Rights Trading Centers”. This initiative is intended to curb speculative real estate transactions and prevent brokers from colluding to manipulate the market.

Additionally, the MoC will continue coordinating with other ministries, agencies, and local authorities to drive forward a project on building at least 1 million affordable housing units. It will also enhance oversight by working with local governments to inspect and monitor real estate transactions and business activities, especially in areas experiencing unusual price surges.

The ministry also suggested that MoNRE closely monitor local land price tables and assess their impact on real estate prices. This will allow for timely proposals to be introduced to mitigate any negative effects on housing prices and market supply and demand. MoNRE is also tasked with reviewing the legal framework to identify any loopholes and recommend necessary amendments to prevent exploitation. This includes addressing misconduct in land auctions that could distort market prices.

The Ministry of Finance, meanwhile, is encouraged to research and propose tax policies that discourage speculative real estate practices, such as short-term “flipping” for profit. This may include taxing second or additional properties, as well as idle land, in line with Vietnam’s socio-economic conditions and international norms.

Various ministries and agencies are also urged to devise strategies to minimize the adverse effects of the revised land price tables in the amended Land Law 2024 on land and housing prices, as well as the overall real estate market’s supply and demand. These bodies should also review regulations around land use rights auctions, with a focus on increasing bid deposits, ensuring realistic starting prices, shortening payment deadlines, and restricting speculation.

At the local level, the MoC calls for inspections of the operations of real estate business, particularly those involved in repeated resales, and stronger enforcement to combat price inflation and speculative activities. Any violations of land and real estate laws must be fully addressed. Authorities should also investigate the causes of price fluctuations in different real estate sectors and propose measures to ensure a stable and sustainable market.

Furthermore, local governments are instructed to review and ensure the transparency of land use rights auctions, identifying and penalizing any legal violations to prevent market manipulation. They should also manage real estate price hikes to align with local economic conditions, avoiding disruptions to local real estate investment and business activities, while ensuring access to housing for all citizens. Lastly, authorities should make public information on approved real estate projects and qualified developers to ensure transparency and prevent fraud in the real estate market.

Local authorities strengthening oversight

Several local governments have recently issued directives aimed at tightening control over real estate market activities. People’s Committees in cities and provinces such as Hanoi, northern Thai Binh province, north-central Thanh Hoa and Nghe An provinces, and the central highlands’ Kon Tum province have sent official letters to relevant departments, districts, and towns urging them to improve land use rights auction practices. Local authorities are also tasked with implementing measures to resolve issues and ensure the real estate market develops in a safe, healthy, and sustainable manner.

Experts believe the real estate market will become more professional in the future with increased regulation from various government levels. Though housing prices may continue to rise due to higher costs, the market is expected to maintain stability, reducing the chances of a real estate “bubble” appearing.