Letting the Market Decide Land Prices

Letting the Market Decide Land Prices

The Ministry of Finance has recently submitted a new land price frame to the government. Most notably, the State's land prices equal 90 per cent of market prices and the roof price in urban areas is VND67.5 million (US$4,299) per square metre.

The Ministry of Finance has recently submitted a draft decree on methods for land pricing and a frame for land prices, which is due to be issued this July, so that localities will have a basis to calculate and announce new land prices applicable from January 1, 2005. Nguyen Tien Thoa, deputy head of the Price Management Department under the Ministry of Finance, said that the new land price frame would make the land market more open and ensure real prices. Therefore, speculation, 'two-price' and 'give and take' mechanisms will be removed. Prices of land will then return to their real level.

Is the proposed price frame close to the market price?

The Ministry of Finance-developed draft decree on identifying land price and price frames for types of lands consists of five chapters, concretely stipulating methods for identifying land prices and conditions for the application of these methods, as well as setting prices of land in localities with nine price frames for each type of land. The price of land in urban areas will range from VND30,000 (US$1.91) to VND67.5 million (US$4,299) per square metre; prices of non-agricultural land for business and production activities in urban areas will range from VND15,000 (US$0.96) to VND47.81 million (US$3,045) per square metre. Meanwhile, land prices in suburban areas will range from VND2,500 (US$0.159) to VND1.25 million (US$79.617) per square metre while non-agricultural land for business and production activities in suburban areas will be put at between VND2,500 to VND900,000 (US$57.325) per square metre.

Thoa said that the new land price frame was developed to ensure that it is close to real market prices. To prepare and finalise the draft decree, the Ministry of Finance surveyed land pricing and use in localities, and gathered ideas from ministries and agencies. It also asked 64 provinces and cities to survey prices of the transfer of land use rights for each type of land in the market. Based on collected data, the drafting board analysed and worked out a popular price of land in localities as a basis for the development of the price frame.

The Vietnam land market in recent years has seen complicated developments in prices of land and houses as the market faces risks of a price 'fever.' In late 2001 and early 2002, land prices in major cities, such as Hanoi and Ho Chi Minh City, heated up and saw a rapid increase. Between late 2001 and March 2002 land prices in Ho Chi Minh City increased by between three and four fold, and in some localities prices rose six or seven fold. A survey to gather ideas from ministries and agencies about the implementation of the 2003 Land Law, which took effect on July 1, 2004, resulted in diverging opinions on land prices. One opinion states that the existing land prices are abnormal and unreal due to speculation and psychological factors. The roof of the price frame should therefore be equal to between 50 and 60 per cent of the market price. Ho Chi Minh City is the leading representative in this opinion. However, in contrast, most localities said that the existing prices had been formed over many yeas and were accepted by society, admitting that there is a speculation factor but it remained small. The Land Law stipulates that prices which are close to the market transfer price, should be equal to 80 or 90 per cent of the real land use right transfer price. An expert from ADB said that the market should recognise abnormal factors when working with the Price Management Department.

'Two-price' and 'give and take' mechanisms removed

Thoa said that the land price frame, due to be issued by the government, was compliant with the Land Law and recognised market prices which have formed and are forming. The price set in the price frame is equal to 75 per cent of the popular price in the market. Provinces can base prices on their individual situation to stipulate higher prices but can not exceed prices stipulated by the government's frame by more than 20 per cent. Therefore, with the 20 per cent margin, prices announced from January 1, 2005, could be as high as 95 per cent of the real price in the market (75 per cent stipulated by the government plus 20 per cent which can be used by localities).

The need for regulation shows that land prices in Vietnam remain much higher than the incomes of most people in comparison with land prices of other countries in the region. Therefore, would an increase in land price become a disadvantage for economic and investment activities? Thoa commented that the Ministry of Finance had considered advantages and disadvantages to find out the nature of land prices. If prices are stipulated much lower than market prices, it will allow the 'two-price' and 'give and take' mechanisms to exist, causing turbulence in the land market and ineffective State management. If prices are stipulated too high, economic activities and land users would be impacted. The new land price frame will make the land market more open, ensuring that it will work closely with prices. Land prices will be decided by the market so that they return to their true course and their real value.

• Thi Van