Policies, and not diktats to real estate businesses, should regulate prices

December 11, 2022 | 08:03 pm PT
Huynh The Du Economist
With the economy suffering from a liquidity bottleneck and the real estate market struggling, I have started hearing comments about what the industry should and should not do.

"Real estate businesses must reduce prices" and "real estate businesses that refuse to follow the market demand to reduce prices will die" are among the things I hear.

To save themselves and save the market, businesses need to reduce prices to bring property prices down to their "real" value is an argument that has become quite common nowadays.

At first glance it seems reasonable to the majority. However, it is a "non-market" point of view, and Vietnam's real estate market has not operated smoothly partly due to this viewpoint being held by both the public and policymakers.

The price of a good is determined by supply and demand.

The equilibrium price is at the point where supply equals demand.

The highest price a buyer is willing to pay is equal to the benefit or satisfaction they derive, and the minimum price the seller is willing to accept is equal to the actual cost incurred plus the desired profit or the actual cost incurred minus the maximum loss they can afford.

Owners of properties (both large and small) are the ones who know best when to sell their properties and for how much. They do not need advice or urging from anyone, especially on whether to reduce or raise prices.

In the case of property, when supply is greater than demand and so there are no buyers, prices will go down on their own.

The most important goal for businesses is to meet the demands of customers and make profits for themselves.

Real estate products are divided into two groups: finished products ready to be put into use and products for hoarding and sometimes for speculation.

For example, apartments in major cities that are always inhabited are finished products, while land plots and projects that will be built in very remote locations, where there is no actual need for housing in the near future, are in the second group.

In terms of efficiency, for society, the cost of real estate is only the cost of construction (including related infrastructure), and the land price is just transferred from one person's pocket to another, and society does not gain or lose anything.

From this perspective, the concern of both society and authorities is how to put finished real estate products to use at their designed capacity to create value for society, and the price will be determined by the rule of supply and demand.

Prices, therefore, should not be the object of interest for policies.

Apartments in HCMCs District 7, August 2022. Photo by VnExpress/Quynh Tran

Apartments in HCMC's District 7, August 2022. Photo by VnExpress/Quynh Tran

The issues with the real estate market in Vietnam are caused by a lack of rationality combined with crowd psychology and a lack of complete information.

Real estate is currently an investment and asset-hoarding channel for Vietnamese.

Most people that buy to invest or hoard assets barely do any research about the property they intend to buy.

The prospect of price appreciation (profitability) is the most important criterion. However, the fact is that in the long term all properties will appreciate. The degree is the only difference, but generally the appreciation will be higher than the interest rate on bank deposits.

Therefore, to bring down real estate prices, the government should not tell businesses to lower prices but instead create mechanisms for the market to operate smoothly and in accordance with these three solution groups.

The first is information transparency and policy consistency. The second is to create channels of information and knowledge so that buyers have enough information and the necessary analysis and judgment capabilities. And the third solution is to have screening and capital allocation mechanisms so that resources are focused on finished products.

In the case of finished products, the decrease in supply in many large cities across Vietnam is due to legal issues. This is also one of the factors pushing up prices.

Therefore, the role of the authorities is to have policies that foster supply and resolve legal issues.

For the affordable and low-income housing segments, land prices hold the key since it is very difficult to reduce construction costs.

There is a lot of public land available, and so low-cost (or even free) land is the most important factor in developing this type of property. This is entirely within the government's ability to do.

In the case of products that are hoarded, ideally they should only be built when put to use, but in Vietnam it is very difficult to eliminate projects that were drawn up decades ago but have yet to be built, especially in places far away from big cities.

To limit these, state agencies need to avoid constantly tweaking urban plans, sparking expectations that land prices will increase based on the plans and thus encouraging speculative activities.

The real estate market in particular, and other markets in general, only operate smoothly when market forces take center stage in transactions, the public perception and policymaking.

*Dr. Huynh The Du is a lecturer at Fulbright University Vietnam, HCMC.

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