What loopholes cause land auctions to be continuously unstable?

Five people were detained for signs of wrongdoing related to paying up to 30 billion VND/m2 in Soc Son district (Hanoi) to "prevent the land lot from being successfully auctioned". This group "raised the price sky high" and then left the auction, causing the auction to fail.

Not only Soc Son, in the past 4 months, consecutive auctions in districts on the outskirts of Hanoi in Thanh Oai, Hoai Duc, Quoc Oai... have caused a stir in the market. The common point of these auctions is that there is a situation of massive buying and selling at a difference, the winning price is pushed to a record high but the deposit is waived or financial obligations are not fulfilled.

According to experts, the root cause of this situation is the "unprecedented" low deposit level because the city has not issued a new land price list, the starting price is calculated without the coefficient (K) in the context of the overlap between the new and old laws.

Before June 2024 - the time when Decree 71 guiding the 2024 Land Law takes effect, the starting price is usually hired by local authorities to conduct valuation consultancy. The consultancy units will appraise based on the comparable properties provided. The city will authorize districts to proactively determine the adjustment coefficient (K). The starting price is determined by the unit price in the land price list (x) the adjustment coefficient, so it is relatively close to the market price.

After Decree 71 was issued, Hanoi stopped the authorization and abolished the regulation on hiring consultants. While the city has not yet issued an annual land price list close to the market price, calculating the starting price based on the land price list issued since 2020 has caused consecutive auctions from August to now to record unprecedentedly low starting prices, only from a few million VND/m2.

According to Lawyer Pham Thanh Tuan, Hanoi Bar Association, the multi-round auction also creates loopholes that many people take advantage of to collude to raise or lower prices.

From August until now, except for the session on August 10 in Thanh Oai and two sessions in Phuc Tho, which were held in a single round of direct voting (all investors will write their bids at once), the remaining districts have held multiple rounds, at least 6-8 rounds with a price range of 3-6 million VND. The auction will end when no one else bids. This regulation is expected to prevent participants from colluding and winning at low prices.

However, Ms. Do Thi Hong Hanh, Vice President of the Hanoi Auctioneers Association, said that organizing the auction in the form of direct voting through many rounds can create opportunities for auction participants to meet, exchange and discuss about bidding.

A major drawback in the above auction is that customers do not lose their deposit even if they bid high in the previous round and then drop out or fill out an invalid bid in the next round.

Sharing the same view, Lawyer Pham Thanh Tuan said that there is currently no regulation to handle the case of investors paying unexpectedly high prices and then stopping the auction, leading to the failure of the auction. In fact, the handling only considers the deposit of the auctioneer. Administrative and criminal sanctions for these acts, if any, need to be clarified by the competent authority.

Loopholes in the auction method have led to market manipulation in some recent auctions. At the November 29 auction in Soc Son, the police accused Pham Ngoc Tuan of offering VND30 billion per square meter, 12,000 times higher than the starting price, when he saw the land prices exceeded the set price.

Paying a "sky-high" price in the 5th round and then dropping out of the 6th round of auction helped the group not lose their deposit but also have the opportunity to continue participating in the auction to buy the desired land lot.

This market manipulation behavior shows signs of spreading. Two days later, 22 plots of land in Do Dong commune, Thanh Oai district also failed to bid despite going through 8 rounds, because investors pushed the price up and then did not continue to bid.

The acts of taking advantage of loopholes in the organization and calculation of starting prices create many consequences for the real estate market. Associate Professor, Dr. Ngo Tri Long- Former Director of the Institute of Price Research, Ministry of Finance, said that these are very sophisticated acts of a group of people who specialize in investing and speculating in land to "surf", transfer to make a profit or push up prices for surrounding areas.

By taking advantage of the unprecedentedly low starting price, this group can easily participate in auctions in large numbers. Because of the low stake, if they successfully sell at a difference, they can earn a profit of 100-500 million VND, a "very attractive" profit in the current difficult market context.

Mr. Long warned that lessons from the past, many auctions also paid record high prices but the winners quickly withdrew their deposits. The consequences affected all real estate segments, increasing land speculation, causing market manipulation. The risk belongs to the end buyer after the "hot coal" is passed around.

Sharing the same view, Ms. Do Thi Hong Hanh warned that pushing up the winning price could "push the surrounding inventory of speculators". Because just at the end of last year, also in these suburban districts, many land auctions were sluggish without registration documents.

Ms. Hanh said that 60-70% of the participants in the recent auction were professional groups, "working in land auctions". This group reacts quickly to market information, "knows how to bargain to win" so that they can make a profit no matter what the difference is.

Ms. Hanh believes that it is necessary to change the form of auction organization to limit exploitative behavior. According to regulations, there are 4 forms of auction including direct verbal bidding, direct voting, indirect voting and online auction.

Ms. Hanh recommends online auctions because it limits the situation of specialized land auction teams colluding to inflate prices and does not incur additional costs.

Expert Ngo Tri Long said that auction organizers need to strengthen the assessment of the capacity of participating customers, for example, they need to clearly demonstrate the source of money when bidding. According to him, land auctions should be considered a special item, and stronger sanctions are needed to handle violations such as deposit cancellation, auction cancellation, "blue team, red team" situation...

In the long term, experts recommend the solution of imposing real estate tax according to the year of ownership as proposed by the Ministry of Finance, helping to reduce the motivation for buying and selling to push up prices of speculative investors, in line with international practice.

Previously, at the end of August, Deputy Minister of Natural Resources and Environment Le Minh Ngan requested provinces and cities to adjust land price lists closer to reality to avoid profiteering in auctions, causing market disruption. In case land prices are not consistent with reality, the provincial People's Committee will adjust them according to the 2013 Land Law, applicable until December 31.