Regulations fail to increase supply of low-cost housing
by Nguyen Chi Trung
The State has issued a number of policies and incentives to encourage the development of low-cost housing to meet the housing needs of the disadvantaged. Yet few public housing projects are underway and little inventory has been added to the low-cost housing market.
Decree No 71/2010/ND-CP, issued in June 2010, offers regulatory guidance for the Law on Housing. The decree defines "public housing" as residential housing constructed by the State or other entities in all economic sectors for purchase or lease by low-income persons in accordance with mechanisms stipulated by the State.
Under Decree 71, investors in commercial housing projects may raise capital by receiving down payments from buyers pursuant to sales agreements for homes under construction, so long as work on the foundation of the building has been completed. This method of raising capital is much more difficult for public housing projects since, in practice, it is not easy to determine who is an ‘eligible buyer'. Although Decree 71 defines which people are entitled to purchase public housing, these persons must be determined to be qualified in accordance with the law.
As a result, investors in these projects have to finance construction by other means. This is difficult, however, since banks are currently hesitant to lend on public housing projects and on real estate projects in general in light of the ‘frozen' market.
In order to satisfy the demand for public housing, provincial People's Committees will, on the basis of the specific conditions within its jurisdiction, may require builders of any commercial housing on a site greater than 10ha to reserve 20 per cent of that land area for the development of public housing.
This stipulation has ended up having a negative impact on the marketability of commercial housing projects. Buyers of more upscale projects are concerned with issues of security and environmental hygiene while these concerns are regularly problematic in areas of low-income housing. Moreover, public housing is frequently not well or regularly maintained. As a result, public housing rapidly degrades and can affect the aesthetics of the whole project.
Since the selling prices and lease rates for public housing units are also controlled by the State, the profit margin from public housing projects is sometimes small or non-existent. Under Article 39.2 of Decree 71, investors are only allowed to set public housing prices to ensure recovery of construction capital and a stipulated level of profit, while Circular No 15/2009/TT-BXD of June 2009 further restricts the profit margin from public housing at no more than 10 per cent of the investment in construction.
The regulated period for recovery of investment capital is also long, at least 20 years for leased housing, counting from the date of the lease is signed, or at least 10 years for rent-to-own units.