Luxury Real Estate in Vietnam – Market Collapses Due to Overbuilding and Shoddy Quality

Luxury Apartments in Ho Chi Minh City

Luxury Apartments in Ho Chi Minh City

Following Vietnam’s property market collapse earlier this year, luxury apartment prices have fallen sharply, with a 30% drop in places like Phu My Hung and as much as 60% in other areas. The slump has been particularly hard in the luxury segment and is not having quite such a strong effect on the medium- and low-priced segments, thanks to continuing domestic demand from a young population in the larger cities.

Independent financial expert, Bui Kien Thanh, said local developers had focused too highly on luxury properties rather than targeting lower-income end users who are in need of housing. He said the luxury segment is set for more trouble since customers have raised complaints about the quality of the apartments they have bought. These complaints need to be addressed and the economy has to recover before the luxury market begins to look up again, he said.

Former deputy minister of natural resources, Dang Hung Vo, said that property prices would continue to fall if  no measures were taken by the government to attract more capital into the industry.

“It will be difficult for the market to recover in the coming year.”

Over-borrowing by developers means cutting prices, he said, adding that many of them were unable to sell after the market began to plummet in the second quarter. Prices in large cities have fallen 40-60% in 2008, and the number of transactions has also fallen dramatically, by 80-90% compared to 2007.

Banks are beginning to auction off foreclosed properties, which will also also increase supply in the market, further eroding prices, Vo told a real estate conference in Hanoi on Friday.

Bank interest rates are still high in Vietnam compared to other countries – the peak rate is over 11%. Foreign investors would keep away due to the global financial turmoil, Vo said. Others added that this means the housing market, particularly the luxury segment, is unlikely to recover in 2009. Meanwhile, the chairman of the HCMC Real Estate Association, Le Hoang Chau said that the Vietnamese government’s proposed US$1 billion package to stimulate domestic consumption will thaw the frozen real estate market, although not the high-end property. Chau said it would give property developers cause for optimism.

Tong Van Nga, general secretary of the Vietnam Real Estate Association also hoped that the stimulus package, part of which will be spent on housing for low-income people, would help the market. There is still great demand for medium- and low-income housing, he said, adding that demand has fallen only in the luxury segment, which accounts for just 10% of the market.

The Ministry of Construction has asked the government to spend part of the package on a plan to build 10,000 apartments for low-income families by 2015. The plan, which seeks to build 5,000 apartments in Hanoi and the same amount in Ho Chi Minh City, will cost around VND2.5 trillion ($151.5 million).

Chau said the medium and low-income market segments are likely to benefit, but not the luxury segment, once the money begins to flow in the first quarter of 2009.

There was a short burst of increased activity in the closing weeks of 2008, as buyers sought to avoid new taxes being imposed on real estate transactions in 2009. With the introduction of the new Personal Income Tax Law on January 1, owners of more than one house will have to pay an extra 2% tax on each property sold. With the city land valuations for 2009 having been increased by at least 10% from last year, residents in Ho Chi Minh City will have to pay higher land use taxes.

Also from January 1, 2009, all traders are required to conduct property transactions through real estate exchanges. As a result, developers and agents are setting up real estate exchanges. The Saigon Real Estate Corporation and Nam Long Real Estate Company are among the companies that have opened their exchanges recently. Some other companies such as Eden Real and Phu My Hung have also announced the opening of their trading centers next month. These real estate exchanges are expected to help improve transparency in the local property market next year.