Vietnam is among nations with the highest house price to income ratios. The fast rise of housing prices in major cities is a big headache for authorities as it aggravates inequality and hinders access to housing by low- and middle-income people. Housing tax is a widely-used measure to control and regulate housing prices. However, taxation alone cannot address the problem.
Houses are properties, and as such are subject to tax when they generate incomes and due to their own inherent attributes. In some nations, a house will be subject to tax when its value reaches a certain threshold. In France for example, a house will be subject to tax when the property value exceeds 800,000 euros, with the tax rate at between 0.5% and 1.5%.
Incomes from a house will be subject to two types of tax, namely the income tax on the rental and the capital gain tax on the difference between buying and selling prices. An individual can add the housing income to other sources of income for tax declaration, or create another legal person liable to the property tax.
The inherent attribute of a house is that it is attached to land, so any owner is liable to the land tax. In addition, upon transfer or exchange and registration of entitlement, the house will be subject to the registration tax like any other assets.
As such, a government can tax housing via the income tax, the land-associated tax, the registration tax, the capital gain tax, and the net-value tax.
Worries over pass-through business
To control housing prices and curb speculation, governments often resort to taxation. However, if the tax rate is still within the homebuyer’s or renter’s payability, then the pass-through practice can still be used: the tax sum is passed through to the next buyer or renter. In theory, if the housing price increase is equivalent to or higher than the CPI growth, then there will be chances for speculators.
The transfer of costs can apply to various taxes like registration and land-associated tax. However, if the capital gain tax rate is high enough to render the net income less appealing, it can help prevent speculation. For instance, if a buyer gains a gross profit of 50% on a house, his or her net profit will only be 15% in case a capital gain tax rate of 70% applies. In such a scenario, housing speculation is no longer attractive in comparison with other investment channels.
The fast increase of housing prices is mostly seen in major cities where job opportunities are abundant and where economic-political establishments are concentrated. But available land in such cities is getting scarce. Higher land prices, costlier materials and more expensive labor make it less viable to develop budget homes. Developers will turn to high-end housing projects for higher profit margins.
Combining taxation with other policies
Lately, the HCMC government has mulled measures to ward off housing speculation, including taxing the second home. However, this policy may not work well given the pass-through mechanism while the tax policy on house transfer is still not effective enough.
Vietnam has plans to draft the Property Tax, but still with a focus on entitlement to assets which in reality is associated with land. In many countries, the housing tax is aimed at creating income for the local budget for maintaining and investing in public facilities and infrastructure. If a locality can use other sources of income to balance its budget, then the housing tax will not apply to those families whose income is lower than a certain threshold. The net asset tax will apply only if its value far surpasses the average income.
In order to restrict housing speculation and pursue the goal of developing “houses merely as places of residence”, both restriction and promotion need to be synchronously applied. Costs for acquiring a high-end house should be increased steeply, and then the sums collected thereof will be used to subsidize budget home developments.
At the same time, the house transfer tax designed to fight speculation must be strictly implemented. The tax rate must be carefully weighed to be high enough to restrict speculation but low enough to encourage investment. In some other countries, the capital gain tax for the first few years is very high, and differs when it comes to distinguishing between a house for residence and a house for investment.
Taxation alone is not enough to prevent speculation in the face of short supply. The success story in Singapore should be a case study for other countries. Accordingly, the Singaporean Government not only uses the tax policy for intervention, but also controls supplies, and offers financial support for first homebuyers via the country’s Housing and Development Board (HDB) and the Central Provident Fund (CPF).
As such, in order to restrict housing speculation, taxation needs to be combined with other synchronous policies like affordable housing for low- and medium-income earners via financial support; boosting house supplies; improving the market transparency; and using savings from the long-term pensioner fund to acquire homes as seen in the case of Singapore’s CPF.