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Sep 04, 2013

Taiwan's spectacular house price rises


 

A 15.43% rise Taiwan’s Lutheran home price index during the year to end-Q2 2013,
 (14.52% inflation-adjusted) follows four years of unbroken house price increases, according to Sinyi Real Estate Planning and Research.  The latest quarter was spectacular too:   the home price index rose a record 7.45% (7.33% inflation-adjusted) in Q2 2013.

During the year to Q2 2013:

  • In Taipei, the capital, house prices rose by 11.51% (10.63% inflation-adjusted)
  • In the New North, house prices increased 14.92% (14.01% inflation-adjusted)
  • In Taoyuan, house prices soared 20.81% (19.86% inflation-adjusted)
  • In Hsinchu, residential property prices rose by 12.59% (11.7% inflation-adjusted)
  • In Taichung, house prices jumped 18.29% (17.35% inflation-adjusted)
  • In Kaohsiung, residential property prices skyrocketed by 26.34% (25.34% inflation-adjusted)  

Local residential property prices in Taiwan vary significantly.

  • Taipei has the most expensive housing market in Taiwan, with an average home price of TWD655,000 (US$21,870) per ping (a customary and traditional unit of measurement in Taiwan which is equivalent to 3.306 square meters) in June 2013.
  • In New Taipei City, the average house price was TWD335,000 (US$11,186) per ping in June 2013.
  •  In Kaohsiung, the average house price was over TWD152,000 (US$5,075) per ping over the same period.
  • In Taoyuan, Hsinchu, and Taichung, the average price of a residential property was just above TWD180,000 (US$6,010) per ping.

Demand remains strong. In July 2013, property sales in Taipei rose by 20% to 4,043 units from the previous month while transactions in New Taipei City increased by 13.7% to 8,066 units, according to Huang Shu-wei of Yung Ching Realty. Likewise, property sales in Taichung rose by 17% to 5,198 units in July 2013 from a month earlier while in Tainan, sales increased by 12% to 2,163 units over the same period, according to Sinyi Real Estate Planning and Research.

Construction activity is also up. Housing permits, an indicator of the condition of the residential construction sector, increased by 3.7% to 34,861 houses in the first half of 2013 from the same period last year, based on figures from the Ministry of Interior.
 
Price rises may be slowed by a planned revision to the domestic luxury tax scheme, put in place in June 2011 to curb property speculation. Under the current scheme, second homes not occupied by the owner and sold within one year of purchase are taxed at 15% while those sold within two years of purchase are taxed at 10%.

“Current rules have flaws, for example, we are unable to tax those deep-pocket investors, who can wait for more than two years to sell properties,” said Finance Minister Chang Sheng-ford.

Changes may include a levy on buyers of properties, as sellers are already taxed. The plan is partly prompted by the widening house price to income ratio, 8.9 in the first quarter of 2013, up from 8.2 the previous year, according to the Ministry of Interior.

The Taiwanese economy is projected to grow by 2.31% this year, after real GDP growth rates of 1.3% in 2012, 4.1% in 2011 and 10.8% in 2010.

Taiwan and China

Relations between mainland China and Taiwan began to thaw after President Ma Ying-Jeou of the Kuomintang Party assumed office in May 2008. He vowed greater cooperation with mainland China and denounced independence for Taiwan, a sharp contrast to his predecessor, Chen Shui-bian.

In his inaugural address, Ma promised “no independence, no reunification and no war” during his presidency. In November 2009, several memorandums of agreement between Taiwan and China on financial cooperation were signed. These symbolic gestures reassured investors and home buyers alike.

In June 2010, an Economic Cooperation Framework Agreement (ECFA) was signed by Taiwan and China.

Chao Teng-hsiung of the Farglory Group, a leading property developer, speculated that house prices can rise by 5% to 10% within the 3 – 5 years of the ECFA signing. In Taipei, Chao said, prices can surge by up to 50% within the same period.

Speculation worries

Taiwan house price index

The strong rise of house prices even before the economy recovery has led to fears that speculators are driving the market.

In a study published in early 2009, Professor Chang Chin-oh of the National Chengchi University (NCCU), noted that residential property prices in Taipei City surged by 50% over the past three years while average household incomes have grown by only 2% over the same period.

In a November 2009 interview with Central News Agency, Chang contends that the situation is not sustainable and that the main driver of house price growth is speculation driven by expectations of future investment by mainland Chinese.

Chang further presumes that speculators account for at least 50% of residential real estate transactions over the past three years.

The observation was supported by Stanley Su, a senior researcher at Sinyi Realty. In the same article by CNA, Su said that “The boom in the housing market is fuelled by low interest rates, which give business conglomerates and speculators leverage to play the market.”

Anti-speculative worries were similarly raised in early 2008 when residential property prices rose by more than 10% y-o-y during the first quarter. In April 2008, Ma announced that he would take measures to curb speculative Chinese capital from disrupting the local real estate market. He suggested the new administration might forbid Chinese investors from reselling local property for five years after purchase.

A domestic luxury tax scheme was introduced in Taiwan recently to curb speculation. Under the current scheme, second homes not occupied by the owner and sold within one year of purchase are taxed at 15% while those sold within two years of purchase are taxed at 10%.

Low interest rates

Taiwan interest rate

Taiwan’s Central Bank has kept its benchmark interest rate at a historic low of 1.25% since February 2009. The move was made to buoy the economy amidst the global economic downturn.

The gradual ascent of key interest rates was halted in 2008 as the effects of the global financial meltdown and economic slowdown reach Taiwan. Heavily dependent on exports, Taiwan was seriously affected by the US economic recession. The key interest rate was reduced from a five-year peak of 3.625% in August 2008 to 1.25% in February 2009.

Taiwan loans

Low interest rates boosted the mortgage market. Loans for house purchase rose by 4.7% from NT$ 4.66 trillion (US$ 146 billion) to NT$4.88 trillion (US$152 billion) over the year to November 2009. Taiwan’s mortgage market is estimated to be around 41% of GDP by the end of 2009, up from 29% of GDP in 2003.

Most residential mortgages in Taiwan are variable rate mortgages with an average maturity of 25 years.

With the signing of the MOU in November 2009. With this, Chinese banks based in Taiwan can now offer mortgages in the country.

Memories of past housing bubbles

Taiwan economic performance

Market analysts tend to be nervous of any sign of a housing bubble because they feel they have seen this before. An extraordinary residential property boom took place from 1986 to 1991, associated with the stock market bubble.

There followed a bust from 1991 to 2002. By the end of 2002 property prices in Taipei City had dropped by around 20%, in Taipei County by 30%, in Taichung area by 40%, and in Kaohsiung area by 50%.

To revive the housing market, in October 2001 a law allowing foreigners to buy property was panned. Other measures included:

  • Low-interest mortgage loans;
  • Allowing enterprises with capital from mainland China to invest in Taiwan´s real estate market;
  • Slashing the land value incremental tax rate
  • Helping organize private asset management corporations; and
  • Expanding the supply of new housing units for people with lower incomes, workers, government employees, and families of servicemen.

The base lending rate was lowered from 7.1% in 2002, to an average of 3.7% in 2003.

The remedy worked. Taiwan’s GDP rose by 6.1% in 2004, by 4.0% in 2005, 4.6% in 2006 and 4.2% in 2007.

With the recent economic contraction, unemployment rose to more than 6% in Q3 2009. It is expected to fall slightly go down to around 5.8% by the end of 2010.

Low yields in Taiwan

Gross rental yields in Taiwan are unusually low, at an average of 2.84%, often a sign of an overvalued market. In April 2009, the highest yielding apartment size was a 75 square metre (sq. m.) apartment, which yielded 3.56%, according to the Global Property Guide.

Taiwan has one of the highest home ownership rates in the world at 87%, while social housing accounts for about 5% of households. And the trend towards home ownership is increasing. Because of this, Taiwan’s rental market is quite small, around 8% of around seven million households.

Modest economic growth

Taiwan gdp inflation

In the second quarter of 2013, the economy grew by 2.49% from a year earlier, from annual real GDP growth rates of 1.5% in Q1 2013 and 3.7% in Q4 2012, according to the Directorate-General of Budgeting, Accounting, and Statistics (DGBAS).

The Taiwanese economy is expected to expand by 2.31% this year, based on the latest forecast released by DGBAS.

In July 2013, the country’s overall unemployment rate stood at 4.25%. From 2001 to 2012, Taiwan’s average jobless rate was 4.6%, according to the IMF.   The unemployment rate among young Taiwanese (aged 15-24) increased to 13.39% in July 2013 from 12.96% in July 2012, as many new graduates have begun to look for jobs.

In July 2013, inflation stood at 0.08%, the lowest level in almost three years. In 2012, the country’s inflation rate was 1.9%, from 1.4% in 2011 and 0.96% in 2010, according to the IMF.

The central bank held the discount rate unchanged at 1.875% for eight straight quarters in June 2013.





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