The ROC Central Bank recently warned that in some heavily promoted regions, strong downward pressure on house prices remains. The bank mentioned Bade and Qingpu townships in Taoyuan County, and Danshui, Linkou and Sanxia townships in New Taipei City as places at risk of a burst property bubble. The bank’s warning has grave implications not just for buyers, but for all involved in the property business, including the financial industry.
One must first understand the reason causing property prices to climb for the past 11 years, despite an oversupply and low-occupancy rate in Taiwan real estate market. The answer is simple. Since the financial crisis, almost all major economies have coupled low interest rates with loose monetary policy, causing a huge increase in capital flow and money supply and freeing up funds for speculative investment in real estate. In Taiwan the incentive to invest has been even stronger due to a sudden drop in estate and gift taxes after amendments to the relevant laws in 2009.
While investors competed to put this easy money into property, it was easy for those in the housing business and speculators to ramp up prices. This spurious investor demand created a false impression of a hot market, causing homebuyers to jump in for fear of being left out in the cold. Simply put, the increase in property prices in the past four years is purely a result of hot money.
The problem is that the hot money will come to an end sooner or later—as soon as loose monetary policy does. Recent U.S. industrial production and employment figures have been optimistic and the magnitude of fiscal easing will eventually be reduced. Global property markets will be the first to feel the impact of the economic upturn and tightened credit. Given the huge size of Taiwan’s property bubble, people should think of the risks involved while they still have time.
Once hot money flows end, the property market will return to fundamentals and be subject to the law of supply and demand. The 1.43 million unoccupied properties islandwide, a ratio of more than 20 percent of total supply, are already putting prices under downward pressure. The problem is further worsened by an aging population, a falling birth rate, and the long-term trend of disappearing demographic dividends from what was traditionally a growing population.
The presence of a bubble is manifest in a wide range of Taiwan property market indexes: average prices are eight times more than average income; average mortgage payments are more than 30 percent higher than household income; property loans exceed 40 percent of gross domestic product; the property price to monthly rental ratio is more than 300 and rental returns are one of the lowest in the world; and for years property price increases have exceeded GDP growth rate and investment demand is more than 20 percent of the total. It is clear the risk from the bubble is enormous.
An examination of last year’s financial reports from listed construction companies tells a similar story. Several famous construction firms recorded earnings per worker from NT$25 million (US$837,000) to NT$116 million, a figure any high tech or financial firm can only dream of.
The government should think of a way to make funds flow to manufacturing industry and public infrastructure. A range of necessary but long-term policies should be instituted to normalize the housing market: the so-called luxury tax should be expanded to encompass all investment, taxation on second homes should be reasonably increased, and a capital gains tax based on actual real-estate transaction prices should be implemented. (SDH)
(This commentary first appeared in the Economic Daily News, June 7, 2013.)