Maginal price of urban flooding in ho chi minh city

ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM 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 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM THE NETHERLANDS INSTITUTE OF SOCIAL STUDIES THE HAGUE 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 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 Chapter 1: Introduction 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., 2014) 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 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 700.000 inhabitants 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 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 is the literature review about the empirical research of house price and the effect of flood risk After that, chapter mention about the methodology and the data The research result and discussion will be presented in chapter Finally, conclusion will come in chapter 5 Chapter Literature reviews 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 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 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.M.A.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 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 ownoccupying 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 Besides, it is widely recognized that the innovation of world financial organization and fluctuation of interest rate give the great advantages for many subprime individuals to enter the owned-occupied housing market through credit activities using the houses as collateral This fact is supposed by Hornstein (2009) to make the demand for housing increase which consequently pushes up the price of real estate The empirical research of Glaeser et al (2010), however, notified that the effect of low interest rate on the change of house price is very small when it could only explain for one-fifth of the house price increase Next, the expectation and preferences of consumers is the fourth factors that makes the house price changed The price of occupying a house gives consumers the information about the amount of money which have to paid for their dream house When consumers expect that the house price will go up in the future, they will be induced to buy houses to take the best price at present Similarly, if the rent fee is intended to be increased in the near future and becomes more asymptotic to the house price, the trend for occupying a private house is obviously in dorminance Hashim (2010) found that these expectations lead to the increase of speculative activities which in turn creates a pressure to make the own-occupied housing demand go up in Malaysia market Supply side Demand side Figure Factors affect to house price under the view of housing demand and supply (Moore and Goodman, 2012) The price of renting a house is moving upward because of high housing demand of increasing population in big cities, it is supposed that there is a transformation in consumers’ trend from renting a house with expensive price to contrive to own a private house with an equivalent price In this case, the high annual rent fee relative to the occupying price of monthly payment plays an important role in inducing people to own a private house Nevertheless, Hargreaves (2002) concluded empirically that the rent gives little effect on the house price in New Zealand and the house price is mostly affected by non-financial determinants of demographic opinion and traditional conception Similarly, Reed and Greenhalgh (2002) examined the Australia real estate market and captured the point that the increase of house price will be controlled if there is a surplus in stock of houses and the unsteadiness neighbors created by the rental activities In aspect of consumers’ preferences, beside the traditional positive effect of type of houses to the price, Van Weesep (2000) and Bryant & Eves (2011) also concluded that location of land where the house is situated significantly affects the house price by the surrounding infrastructure, facilities and services If owner-occupiers have chosen the suitable area for their preferences such as locating in frontage of the street, adapting to life enjoyment, entertainment, demographic characteristics, memories, chances for studying or environment, etc which bring them enough amount of willingness to pay for the amenities, their perception about the land value which is expressed through the price of the land will become higher, and vice versa Obviously, it is absolutely suitable when a house that is near to school, hospital, supermarket, bus station, restaurant, cinema or other common facilities has a high sale price Hilber and Vermeulen (2016) echoed that the difference in preferences of buyers about amenities surrounding a location is an important factor to determine the price of land It is noticeable that their research found no significant effect of land elevation on the house prices-earning elasticity which is one of the most concern determinant of climate change However, the impact of dis-amenities around a house such as waste, flood risk or pollution area also give a negative effect on the price of land as well Sivitanidou (2011) also noticed that another important group of determinants could affect house price in the view of the supply side of real estate The supply of real estate is simply the market ability to afford quantitatively to real estate demand which expresses mainly through the new housing construction, “expectations regarding demand/rents/prices (myopic or adaptive) and uncertainty and risk (volatility of local economy and real estate market) “ Initially, the new housing construction is defined as the completion of constructing a house in accordance to the approved design of authorities and qualification standards as well as having the final certificate of house There are many determinants that give effect to the new housing construction The important determinants are land cost and construction cost which includes materials and labor Theoretically, these elements are considered to give the negative effect to the availability of new houses in the market because when the availability and price of labor, land or materials increase, it is absolutely made the cost for completing the construction project increase as well As the result of this, the profit of investors will be lower which make their motivation of producing more new houses in the future become downturn, then, the supply resources of house will decrease as well 10 Bank1.TaySaiGon.L 87 88 113,805,0 ocRef2 Bank1.AnPhu Bank1.TaySaiGon.L 114,676,6 89 117,877,5 ocRef1 Bank1.NamSaiGon 90 120,000,0 LocRef2 48 APPENDIX DATA OF 218 OBSERVATIONS Note: To protect for bank’s information, the name of banks are hidden Price ( monthly, STT Company Viet Nam dong) Bank1.NguyenTatTh 91 120,000,0 anh.LocRef1 Bank1.ChoLon.Loc 92 93 120,000,0 New1 Bank2.LeVanSy Bank2.TrungTamTh 94 122,375,0 131,964,7 e Bank2.HoangVanTh 95 96 144,513,7 Bank2.3Thang2 Bank2.NguyenDinh 97 98 147,740,0 Chieu Bank2.BenNghe Bank1.ChoLon.Loc 99 100 150,187,5 162,000,0 New2 Bank1.Pasteur Bank2.HuynhThucK 101 102 144,625,0 163,862,6 171,325,0 hang Bank1.PhuNhuan Bank1.ChoLon.Loc 103 204,930,0 222,000,0 New3 Bank2.CachMangTh 104 105 106 107 108 109 229,575,5 ang8 Bank1.TanBinh Bank2.HoChiMinh Bank2.Quan1 Bank1.PhuMyHung Bank2.SaiGon 259,371,0 274,987,7 311,500,0 341,418,1 363,987,7 49 APPENDIX DATA OF 218 OBSERVATIONS Note: To protect for bank’s information, the name of banks are hidden Price ( monthly, STT Company Viet Nam dong) 110 111 112 113 114 Bank1.ThangLoi Bank2.CongHoa Bank1.DoXuanHop Bank1.HiepPhu Bank2.Quan3 Bank1.TruongVinhK 115 116 117 458,016,0 20,464,00 26,250,00 30,017,32 30,037,50 30,800,00 y Bank2.HungVuong Bank2.ThuDuc Bank1.TanHuong.Lo 118 31,150,00 33,375,00 33,600,00 cNew3 Bank1.BeVanCam.L 119 120 121 122 123 35,000,00 ocNew3 Bank1.VoVanNgan Bank1.LeVanTho Bank1.ApBac Bank3.CauOngLanh Bank1.BayHien.Loc 124 36,225,00 36,300,00 36,300,00 37,000,00 39,000,00 Ref3 Bank1.AuCo.LocNe 125 126 127 40,000,00 w Bank1.BayHien Bank1.PhuTho 40,000,00 40,000,00 128 Bank2.AuCo Bank1.NguyenAnhT 40,050,00 129 130 131 40,250,00 hu Bank1.LeDucTho Bank1.ThaoĐien 41,800,00 42,000,00 50 APPENDIX DATA OF 218 OBSERVATIONS Note: To protect for bank’s information, the name of banks are hidden Price ( monthly, STT Company Viet Nam dong) Bank1.TanHuong.Lo 132 133 134 135 136 137 138 139 42,000,00 cNew1 Bank2.NguyenTrai Bank1.PhuXuan Bank1.ToKy Bank2.BinhTan Bank2.LeDucTho Bank1.BacHai Bank1.ĐinhBoLinh Bank3.PhamNgocTh 140 42,000,00 43,000,00 44,000,00 44,500,00 45,000,00 45,529,00 47,250,00 47,608,70 ach Bank1.HuynhTanPh 141 142 143 48,300,00 at Bank1.TanSonNhat Bank3.TanHuong Bank1.BayHien.Loc 144 48,620,25 49,432,00 49,500,00 Ref2 Bank1.DinhBoLinh 145 146 49,500,00 LocRef1 Bank3.HangXanh Bank1.PhuXuan.Loc 147 148 52,300,00 54,000,00 Ref2 Bank1.PhoCoDieu 55,000,00 Bank1.LanhBinhTha 149 55,000,00 150 ng Bank1.AuCo.LocRef 55,000,00 151 Bank1.AuCo 55,000,00 51 APPENDIX DATA OF 218 OBSERVATIONS Note: To protect for bank’s information, the name of banks are hidden Price ( monthly, STT Company Viet Nam dong) 152 153 154 Bank3.NguyenTrai Bank2.TanThanh Bank1.ThuanKieu Bank1.PhamNgocTh 155 156 55,000,00 55,625,00 55,650,00 57,045,12 ach Bank1.MinhPhung Bank1.TanHuong.Lo 157 57,330,00 57,750,00 cNew4 Bank1.TanHungThu 158 159 58,000,00 an.LocRef2 Bank1.TanHuong Bank1.AuCo.LocRef 160 59,400,00 60,000,00 Bank1.HuynhTanPh 161 162 60,000,00 at.LocRef1 Bank3.LeDaiHanh Bank1.HungDao.Lo 163 60,000,00 60,000,00 cRef1 Bank1.TanHungThu 164 165 166 60,000,00 an.LocRef1 Bank1.BinhTien Bank3.TranHungDa 60,000,00 61,000,00 167 168 169 o Bank2.BauCat Bank1.SaiGonManor Bank3.VoVanTan Bank3.PhanDinhPhu 62,300,00 63,694,40 64,940,00 170 65,000,00 ng 52 APPENDIX DATA OF 218 OBSERVATIONS Note: To protect for bank’s information, the name of banks are hidden Price ( monthly, STT Company Viet Nam dong) Bank1.PhanXichLon 171 172 65,479,82 g Bank3.HauGiang Bank1.BayHien.Loc 173 174 175 176 177 66,000,00 New2 Bank1.TanThuan Bank1.Bau Cat Bank3.TruongChinh Bank1.BinhThanh Bank1.TanHuong.Lo 178 179 68,975,00 70,000,00 LocRef2 Bank1.ToHienThanh Bank1.3thang2.Loc 182 183 66,425,25 66,550,00 67,200,00 67,680,00 68,250,00 cNew2 Bank2.ThongNhat Bank1.DinhBoLinh 180 181 66,000,00 70,000,00 75,000,00 Ref1 Bank3.TanDinh Bank1.LeQuangDin 184 75,000,00 75,405,00 h.LocNew2 Bank1.TanHungThu 185 76,865,25 an Bank1.HungDao.Lo 186 77,000,00 187 cRef2 Bank1.ToKy.LocRef 77,000,00 188 189 Bank2.ThanhDo Bank1.CaoThang 77,875,00 79,000,00 53 APPENDIX DATA OF 218 OBSERVATIONS Note: To protect for bank’s information, the name of banks are hidden Price ( monthly, STT Company Viet Nam dong) Bank1.BachĐang 190 79,000,00 (HCM) Bank1.BeVanCam.L 191 80,000,00 ocNew4 Bank1.ThaoDien.Lo 192 193 194 195 196 197 82,500,00 cRef2 Bank3.NgoGiaTu Bank1.Quan10 Bank2.LeDaiHanh Bank2.ThanhDa Bank1.HungDao Bank3.3thang2.Loc 198 83,214,20 84,000,00 84,550,00 84,550,00 84,700,00 85,000,00 Bank3.PhanDangLu 199 88,102,88 u Bank2.ChauVanLie 200 89,000,00 m Bank1.CachMangTh 201 89,250,00 ang8 Bank1.BinhThanh.L 202 91,000,00 ocRef2 203 204 205 206 207 Bank2.Quan9 Bank1.VanThanh Bank1.ThanhĐa Bank2.ChoLon Bank1.KyHoa Bank1.TanDinh.Loc 93,450,00 99,000,00 101,640,0 102,350,0 105,000,0 208 110,000,0 Ref1 54 APPENDIX DATA OF 218 OBSERVATIONS Note: To protect for bank’s information, the name of banks are hidden Price ( monthly, STT Company Viet Nam dong) Bank1.TanDinh.Loc 209 110,000,0 Ref2 Bank1.BinhThanh.L 210 110,000,0 ocRef1 Bank1.TanThuan.Lo 211 120,000,0 cRef2 Bank1.BeVanCam.L 212 213 214 215 216 217 218 122,375,0 ocNew1 Bank2.TruongSon Bank1.TânDinh Bank2.Quan5 Bank1.MinhKhai Bank1.Quan5 Bank1.BuiThiXuan 122,375,0 133,500,0 137,000,0 160,000,0 170,000,0 191,657,3 55 ... Overview of the urban flooding problem in Ho Chi Minh city Urban flooding condition has become the serious problem in Ho Chi Minh City The reason for flooding is considered to come from three main... 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 Chapter 1: Introduction Problem statements Ho Chi Minh City (HCMC)... which incorporate with the urban flooding condition of Ho Chi Minh City Scope of the research This research is executed on the data of rental price of three commercial banks in Ho Chi Minh City