Taiwan Today

While much of the developed world has been seeing a boom in house prices in the last decade, Taiwan has been in a prolonged slump from which it is just emerging. The home sales index for 2006 finally climbed above the pre-slump level attained nine years before, while the sales price index has also reached a 10-year high, according to a quarterly report of indicators produced by Cathay Real Estate, released in January 2007. If the market duplicates last year's 3.51 percent increase in sales numbers, transactions should reach around 466,000, the third highest volume in history.

Data released by the Institute for Physical Planning and Information (IPPI) under the Council for Economic Planning and Development (CEPD) shows the average home price in the third quarter of 2006 to be NT$5.88 million (US$180,960). This might not seem intimidating for some other countries. The United Kingdom tops the global property inflation trend, with an average home price of ?01,090 (US$391,740). But the problems faced by British would-be homebuyers and their Taiwanese counterparts are not dissimilar, for all Taiwan's lower cost. The average UK house price represents eight times the average annual income--which has led some to dub Britain the most expensive country to live in the world. But while the average home price is lower in Taiwan, the ratio of cost to income in Taipei is even greater than Britain's--eight to nine times, according to official data and 10.5 times according to information gathered by real estate agents. Taiwan's national average ratio is 6.6 times.

As the level of per capita annual income increases along with demands for a better living standard, house purchases should, in theory, increase. Yet, while Taiwan's per capita income has grown by 32 percent in the past 10 years, house prices have not moved in tandem. This is largely due to a glut of dwellings on the market. Precise figures on the scale of oversupply do not exist, but, as an indicator, some 17.6 percent of dwellings are currently unoccupied according to the Ministry of the Interior (MOI)--though all are not necessarily for sale--which is far above the average of between 3 and 5 percent in other countries.

Confidence Counts

The domestic residential housing market has seen booms before; the last one taking place between 1986 and 1990. A boom in liquidity forced the stock market to unprecedented heights while house prices were driven up an average of 250 percent. The boom left many people unable to afford a house and resulted in social unrest. Accordingly, the government intervened with credit control measures in order to cool the market. Over the following decade average prices fell by about 20 percent, bottoming out in 2003 with the havoc wrought on consumer confidence by the SARS outbreak.

Since then the market has slowly been recovering. Chang Chin-oh, a professor of land economics at National Chengchi University and project director at the Taiwan Real Estate Research Center, thinks this is a result of a recovery in consumer confidence and the comparatively low level of interest rates on home loans, which remained under 3 percent until 2006, providing buyers with low-cost finance for home purchases.

To further help homebuyers, the government also offered various kinds of subsidies for home loans, including low interest rates for first-time buyers and help with deposit provision criteria, for which a budget of NT$1.95 trillion (US$60 billion) was allotted. Generally speaking, a prospective homebuyer with a good credit history and reliable income could borrow up to 85 percent of the purchase price of a property--previously limited to 70 percent. Building equity in the form of a house purchase has become a popular form of investment.

Home loans accounted for almost 40 percent of overall bank loans in Taiwan in 2006 and showed an increase of 11.7 percent over the previous year. Data compiled by Taiwan's central bank showed NT$4.44 trillion (US$136 billion) in total outstanding home-related loans in January, the highest in 30 months. The rise in capital demand also reveals more robust growth in the market.

Activity in the housing market is mostly building up in northern Taiwan, especially Taipei. The average house price in the capital was around NT$8.5 million (US$255,000) in 2006, much higher than other regions, indeed four times higher than in the south. Chang says the comparatively low price rises in southern Taiwan can be attributed to the lower rate of industrial development in the area. But the media have been drumming up expectations of a possible price increase. One recent headline told readers that in Kaohsiung they should "rush in and expect a 30 percent annual return." The article suggested that the opening of Taiwan's bullet train service at the end of last year would lead to an adjustment of the regional market imbalance and a boom in southern property.

Topping Out?

In the north, where land costs are much higher and market demand exceeds supply, the market boom was initially moving in line with expectations. But the price hike might be reaching a practical limit; the home price-to-income multiple is now so high that further across-the-board rises are difficult without a significant rise in incomes. A survey by IPPI showed that four in 10 house buyers last year were over-extended. "Mostly it is investors who are fueling the house price hike," Chang says. Low interest rates provide investors with leverage to play the market. Speculators reap profits by renovating a house on a bank loan and selling it at a much higher price within a short time. Chang says that the two main types of residential properties in demand in Taipei are at opposite ends of the market, the so-called "luxurious" mansions and studio apartments, though neither kind of property really caters to the needs of the majority of house hunters. According to Chang and other market watchers, the principal players pushing prices last year were short-term speculators. "The data acquired through academic studies shows that deals by speculators accounted for 30 percent. But the actual percentage, we learned from private channels and realtors, was as high as 50 to 70 percent," Chang says.

Houses priced below NT$3 million (US$92,300) saw the highest sales rate, accounting for more than 80 percent of home sales in 2006. Chou Chuang-yun, spokesman for Sinyi Realty Inc., Taiwan's largest realtor and the only one listed on stock market, thinks the price rises for luxury dwellings and studio apartments have just about run out of steam. "It is reasonable to expect a slide in home prices this year," Chou says. "A large proportion of studio apartment buyers are speculators. As to luxurious properties, forecasts vary. Taiwan-based manufacturers in China are said to be the principal buyers," Chou says. Sinyi Realty's average selling period is 1.5 to 2 months.

"The size of the boom in recent years is not as great as before, but it has lasted for a longer period of time. The recovery of the housing market was originally a normal phenomenon," Chang says. "But I think lately, the market has been getting a little overheated." Yet warning signs have emerged that the boom has run its course. First, the total number of home sales started to decline in the fourth quarter of 2006. The number of existing homes on the market increased by 57 percent, which weakened demand-push price increases, construction companies are building fewer new homes, and consumer confidence regarding future house prices has also slid a little.

Toughening Lending

One thing that could cool off a hot housing market quickly is an end to cheap and easy money. This does not necessarily involve raising interest rates--though they did in fact rise a little in 2006--but rather toughening lending criteria. In fact, in what might turn out to be a self-fulfilling prophecy, banks, worried about oversupply leading to a slide in prices, which in turn will undermine the ability of speculative buyers to service their debt, have become more cautious in lending. Chang thinks that this will be helpful to the market in the long term. "A downward adjustment is needed so that market dynamics can be sustained," he says.

One of the problems with the housing market, however, is that banks, along with other participants, actually lack sufficient information to make the best decisions. Domestic housing information systems have been set up and operated for some time by various institutes or organizations, but such systems are widely seen as unable to accurately reflect market dynamics. Since the property market varies greatly between different localities, information is not only hard to collect but also can not flow freely. For example, take the average house price. Because house sales are subject to capital gains tax, banks, realtors and sellers are reluctant to provide information about actual prices paid. To get a more precise idea about average house prices, one might need to refer to the posting price and take the negotiation range into account. Even the number of vacant houses is controversial---the national population census in 2001 showed that there were around 1.2 million. But no one knows how many are on the market.

"The drastic fluctuations of the housing market can be attributed to a lack of transparency, and the government should do more to improve this. But consumers also bear some responsibility," Chang says. "Consumers need to see houses as homes rather than just investments. They also need to pay more attention to matters such as maintenance."

Owning a home is often something to which most households aspire in Taiwan. The current average home ownership rate in Taiwan is 87 percent, according to the MOI, which is very high compared with foreign countries. "Half of the nation's wealth is in the property sector," Chang says. Buoyant prices have pushed up costs and buyers with mortgages of over 50 percent of the price of their property are commonly overextended. According to a CEPD report in March of this year, home loan repayments accounts for around 40 percent of monthly household expenditure. "The over investment in property reflects people's belief in the traditional idea of 'land is wealth.' They tend to put all their money into a house and sacrifice other things such as travel, education, leisure, etc. Their quality of life is thus comparatively poor," Chang says. He calls this phenomenon "poverty in affluence."

A Paucity of Information

Another reason people prefer to own their own house rather than rent is because of the opacity of the rental market. Agents willing to broker between landlords and tenants usually charge high fees or are interested only in luxury property or in starting a relationship with a landlord in case he or she decides to sell the property rather than to let it. As a result, letting agreements are mostly struck privately between individual landlords and tenants, making the collecting of information about them difficult, all the more so because they often involve the avoidance of tax on the part of the landlord.

This lack of information means the market is less efficient. On top of this both landlords and tenants enjoy less legal protection than is common elsewhere, while yields--the ratio of annual rent to a property's value--which in countries such as the UK can be 7 to 8 percent, in Taiwan seldom tops 5 percent. Indeed some home owners consider the return on renting out property so small for the trouble it involves that they would rather leave a house empty and simply hope to make money on the appreciating value of the property. Low rental yields also mean that landlords are less willing to spend money on property maintenance. But without proper maintenance, a building's life would be shortened. Whereas in many developed countries, especially in Europe, there are vast stocks of desirable residential property well over a century old, in Taiwan buildings more than 50 years old are considered to be at the end of their lives.

"The current home rental market leaves much to be desired. With no tax incentives or deductions for property maintenance and renovation being provided, landlords tend to be reluctant to spend extra money to improve the condition of the property," Chang says. Under such conditions, people find it hard to find satisfactory property to rent, and all they can do is buy a house. But then they will be hobbled by a mortgage. "The government needs to develop the rental property market," Chang says. "Realtors require a larger rental market to manage efficiently. As economies of scale emerge, profits will accrue and quality will be enhanced."

The government's housing policy has been focused on providing subsidies for home purchase for years. In the past, the government built public housing for people who met certain criteria and who were allowed to purchase homes at the cost of their construction. Laborers, civil servants, servicemen and aborigines all had differing criteria of eligibility. Chen Shwu-Jiuan, deputy director of Public Housing Division of the MOI's Department of Land Administration, says that at the end of this year a new policy will be introduced which will provide subsidies for house purchase based not on profession but on income levels. Some 30,000 households are expected to benefit. Minorities in particular will receive more government help on loan interest. The government will also start rental subsidies for households, with eligibility based on income levels, a program expected to affect about 12,000 households per year.

Issues affecting building maintenance have been tackled, but problems remain. The Regulations for the Management of Apartments and Mansions, promulgated in 1995, is the principal legislation tackling residence management and maintenance, but this ordinance is basically self-regulatory in nature and largely relies on residents' self-discipline, rather than tools of enforcement. It has been suggested that allowing building maintenance work to be offset against tax liabilities would help, but the government is currently so strapped for cash that any erosion of its tax base is probably out of the question. "Foreign building management companies could enhance the efficient use of housing," Chang says.

While the market is expected to gradually adjust itself, more effort needs to be made to enhance living quality. The MOI has devised minimum living standards to serve as a basis for providing government renovation subsidies and as indicators of residential environment upgrading. Reconstruction plans for buildings rendered uninhabitable, such as apartment blocks built with sea sand or radioactive rebar, or housing damaged by natural disasters are being promoted, as is quality construction such as "green" building methods. Mechanisms to encourage landscape renovation and plans to promote better community environments have also been included in recent policy outlines. Truth to tell, much needs to be done before the phenomenon of "poverty in affluence" can be eliminated.

Write to Zoe Cheng at zoecheng@mail.gio.gov.tw