UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE MARGINAL PRICE OF URBAN FLOODING IN HO CHI MINH CITY BY VO LE MINH PHUONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2017 1 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE MARGINAL PRICE OF URBAN FLOODING IN HO CHI MINH CITY A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By VO LE MINH PHUONG Academic supervisor: Dr. PHAM KHANH NAM HO CHI MINH CITY, December 2017 2 Abstract This study applies hedonic price function to estimate the effect of urban flooding of Ho Chi Minh city. Instead of using the sale price, this study alternatively uses the rental price from three commercial banks located in Ho Chi Minh City as the dependent variable. The explanatory variables are structural characteristic, locational characteristic and flood risk existence.
The result shows that the structure of house has positive correlation with the rental price, the location of real estate gives the negative effect on rental price and the flood risk existence makes the rental price decrease. As the result of this, the marginal price of urban flooding of Ho Chi Minh City is -8,570,172 Viet Nam Dong in mean value of variables. Problem statements Ho Chi Minh City (HCMC) is the biggest flagship economic center of Vietnam and plays the role as an important marine transit station of the South East Asia. This city has such a rapid population growth rate and urbanization development that make it a promise land in the view of labor force from other provinces (Kontgis et al.
The increase of population and market economics has been causing an enormous pressure to the antique French colonial infrastructure in many aspect of the housing need, the garbage disposal solution, the adaptation of drainage system, the transportation, the education, the standard of living, etc. To relieve this pressure as well as broaden the city, the authorities approved for many short term and long term projects, such as constructing many new houses, apartments and buildings, widening and zoning the existing streets in corporate with opening the new ones, bulldozing the rivers to supplement land resources, creating more jobs through licensing many industrial parks and production factories, etc. Unfortunately, the old drainage systems are not renovated in a compatible way yet so that it is widely believed that solutions for Ho Chi Minh’s infrastructure conversely give the additional bad effects to the significant flooding condition of some low elevation areas of the city besides the well-known natural causal of high tides and climate change. This synthetic flooding risk is considered as an environmental factor affecting the people’s lives, trading and production activities.
3 In the record of Steering Center of the Urban Flood Control Program of Ho Chi Minh City, in recent centuries, this city usually faces with the large-scale floods especially in the rainy season from June to October of each year in corporate with the annual highest tide peaks from October to November. The high intensity rainfalls with enormous water level cannot drain quick enough through the old and overloading drainage system of the city make huge desperation for its citizens. A research of Committee of Ho Chi Minh city’s government in 2012 alerted that the average affected area by flood of city is 5.944 hectares with nearly 700. It is obviously that the flood risk in Ho Chi Minh City has caused a very serious impact and damage for the living and wealth of citizens so that it becomes the most concentrating subject in mainstream media channels as well as government programs.
After each flood event, people tend to give scattered complaint about the damage of wealth as well as the waste of time and efforts to overcome the flooding situation with taking inadvertently no notice of the long-term damage of flood risk which is expected to be more serious than the short-term one. This research will capture the long-term effects of flood risk as the foundation for estimating the marginal price of flooding in Ho Chi Minh City which is so-called the willingness to pay for avoiding the flood risk with the application of a traditional and popular methodology for capturing the effect of environmental factors: the hedonic price function. The Hedonic Price Function is established on the price of real estate. However, in the lack of real house selling price data of Vietnam real estate market, this research examines the variability of rental price of properties in Ho Chi Minh City with the presence of flood risk beside the structural and locational attributes of the houses.
The rental price is also a transaction price. This transaction price is better than sale price since it often reflects the market equilibrium price while sale price is often not equilibrium price since buyer and seller tend to hide the real price. The rental price is considered as an accordant proxy for value of property instead of the house price. Research objectives: The study aims to estimate the marginal price of urban flooding in Ho Chi Minh city.
By using the hedonic price function, this study will reveal the relationship between the value of properties and theirs physical and locational characteristics which incorporate with the urban flooding condition of Ho Chi Minh City. Scope of the research 4 This research is executed on the data of rental price of three commercial banks in Ho Chi Minh City collected in the period from January to March 2017. These banks have the enormous physical network of branches that spread all over the city. Beside the important characteristics of structure and location of real estate, flood risk will become another essence element that affects to the value of properties.
The initial hypothesis of this research is that the flood risk may give a negative effect on the rental price of properties which is located in and surround the flooding affected areas. Structure of the thesis This paper is constructed as follows. Chapter 2 is the literature review about the empirical research of house price and the effect of flood risk. After that, chapter 3 mention about the methodology and the data.
The research result and discussion will be presented in chapter 4. Finally, conclusion will come in chapter 5. Empirical studies of real estate (house) price In literature, there are many research about the real estate (house) price and its influencing factors. According to Oxford English Dictionary Online, real estate is defined as “property consisting of land or buildings”.
Nevertheless, it is widely accepted that the price of house has to comprise the value of land where the house is built in, the cost of housing construction and other added tangible and intangible costs. Glaeser et al. (2005), indeed, stated that the increase of house price has been caused by the increase in construction costs, the price of land and the “price” of certificate for building a new house. Similarly, Grimes and Aitken (2010) emphasized that the housing supply is significant affected not only by the cost of house and cost of construction but also by the value of land.
Kamal et al. (2016) generally summarized that the house price is mainly affected by land, location, macroeconomic factors, demographic factors and industry factors. Coming after the previous research, the targeted real estates in this thesis will be defined as aggregate properties that include lands, the houses attached to lands as well as other related factors. The next parts will mention about the factors that give effects to the fluctuation of real estate price.
Buying a house can be considered as a residential investment or just an ordinary contemporary investment to resell in future to gain the profit. As the result of this, the buyers of houses are usually classified into two groups: the first group buy houses for consumption purposes and the second group buy houses for investment purposes (Glzindro, 2008). Because the nature of real estate is an ownership transferable goods so that its price is believed to be influenced mostly by the demand – supply rule. In other words, when the disparity happens between the house buyers and house sellers, the price of house will fluctuate consequently.
Figure 1 generally described the factors that affect to the house price under the view of housing demand and supply. In the demand side, Mourouzi Sivitanidou (2011) proposed a theory that the consumers would be induced to own a house by the basic residential demand caused by the increase of population and employment, the growth rate of household formation, the development of household income, the relative price of buying a house in compared with renting price and the expectation of citizens about the prospective reselling price in the future. All these factors are considered to be positively correlated with the real estate demand. This theory is quite 6 similar to the statement of Hofmann (2004) that the macroeconomics determinants such as “economic growth, inflation, interest rate, bank lending and equity price” play an important role in explaining the fluctuation of the house price.
Firstly, the effect of population and employment growth expressed through the fact that the demand for a fixed own-occupied residence will become to be more essential when the city is gradually crowded with employees from other places. MacDonald (2011) who had practically analyzed the Malaysia population growth rate, the migration and retire condition of citizens implied that those demographic factors made the housing demand in Malaysia increase significantly. Likewise, a projection report of Council, M.P (2014) of Metro Boston estimated that when the household size is reduced by the larger number of single family, the increasing number of divorces and the fewer children in one American family, the quality requirement of housing units up to 2040 will increase 10% in compared with the present demand. Furthermore, urban centers tend to attract the labor force from other regions which is believed to make the demand for house increase.
Besides, Voith (1999) proved that the house price in market will increase when employment grows but this phenomenon varies according to the characteristic of this growth. Specifically, the fragment growth of job will only make the price of land and new houses in suburban region increases while the concentrated job growth, on the contrary, will give positive effect on the price of existing houses. Secondary, the household formation rate has a very important impact on housing demand because each household essentially need a house to shelter. The preferred consumption trend of young and single household is to rent house while the married people usually want their family to be settled down by owning a house.
As the result of this, the high household formation rate will cause the demand for housing increase. Smith (1984) had examined the phenomenon of increasing in number of household of United States up to 150 percentages in period of 1961 – 1983 claimed that this increase of households made the housing demand go up because every household tend to occupy a house for their living, Flavin and Yamashita (2002) also showed that the demand of people to own a private house depends increase with the rate of population growth and household formation. Besides that, these authors mentioned that the income of people also gave effect on housing demand. The third element is the change in real household income and 7 innovation in financial market and economics.
Actually, when the income of family is increased, they can obviously afford to the house price in the market which induces the own- occupying housing needs upward. Hashim (2010) proposed that the increase of household income would give positive effect on the family ability of paying financial debt which made the purchasing power as well as the housing demand increase.