Taiwan’s housing market is losing steam

Taiwan’s housing market is now cooling, amidst declining demand and slowing residential construction activity.

Taiwan’s Lutheran home price index recorded zero growth during the year to Q3 2023, in stark contrast to the strong increase of 15.64% in the same period last year, based on figures from Sinyi Real Estate Planning and Research. It was the weakest performance since Q4 2016. When adjusted for inflation, nationwide house prices dropped 2.85% in Q3 2023.

Quarterly, Taiwan’s house prices fell by 1.72% (-2.97% inflation-adjusted) during the latest quarter.

In Taipei, the capital, house prices rose by a meager 0.25% (and fell by 2.6% when adjusted for inflation) in Q3 2023 from a year earlier, a sharp slowdown from the prior year’s 10.28% growth. It was one of the capital city’s weakest results in the past six years. Quarterly, house prices in Taipei increased 0.42% (-0.86% inflation-adjusted) during the latest quarter.

For the country’s other major cities:

  • Xinbei house prices rose by 4.69% (1.71% inflation-adjusted) y-o-y in Q3 2023, down from the prior year’s 14.3% rise. Quarter-on-quarter, prices increased 1.9% (0.6% inflation-adjusted).
  • Taoyuan house prices rose by 6.54% (3.5% inflation-adjusted), following a y-o-y growth of 15.75% in Q3 2022. Quarterly, prices were up by an average of 2.55% (1.25% inflation-adjusted) in Q3 2023.
  • Hsinchu house prices increased by a minuscule 0.77% and fell by 2.1% in real terms during the year to Q3 2023. It is a sharp deceleration from a y-o-y growth of 41.54% in the previous year and its weakest showing since Q4 2017. During the latest quarter, prices were up by 0.83% (-0.45% inflation-adjusted) q-o-q.
  • Taichung house prices also increased by a modest 4.1% (1.13% inflation-adjusted), following a y-o-y rise of 19.75% in Q3 2022. Quarterly, house prices rose by 4.51% (3.18% inflation-adjusted).
  • Kaohsiung house prices rose by 8.57% (5.48% inflation-adjusted) y-o-y in Q3 2023, a slowdown from the previous year’s 17.09% growth. Quarter-on-quarter, prices were up 2.69% (1.38% inflation-adjusted).

Taiwan’s house price annual change

Demand is now falling. In the first eleven months of 2023, property transactions in Taiwan’s six major cities totaled 212,606 units, down by 4.7% from the same period last year, according to statistics released by the six local governments.

The number of property transactions around Taiwan is projected to reach around 300,000 units this year – the lowest in four years.

Residential construction activity is also showing signs of slowdown. In the first three quarters of 2023, the total number of residential construction licenses fell sharply by 18.1% to 109,507 as compared to a year ago, according to figures from the Ministry of Interior.

Taiwan’s economy grew by 2.32% in Q3 2023 from a year earlier, following a year-on-year expansion of 1.41% in Q2 2023 and contractions of 3.49% in Q1 2023 and 0.68% in Q4 2022, according to the Directorate General of Budget, Accounting and Statistics (DGBAS). While it is the best showing in the past four quarters, it remains lower than the government’s estimate of a 2.54% growth, amidst slowing global demand for electronics. With weak trade, many companies have scaled back investments.

As such, the government recently downgraded its 2023 growth projections for Taiwan to 1.42%, down from its earlier estimate of 1.61% growth. If the economy grows as predicted, it would be its worst performance since 2009. The International Monetary Fund (IMF) is even more pessimistic, projecting a minuscule growth of 0.8% for Taiwan this year.

The upcoming presidential election slated for January 13, 2024, creates additional uncertainties in the local property market.

Housing affordability is a major problem

Taipei is one of the world’s most expensive cities. Taipei’s house price-to-income ratio has risen sharply from just 6.4 in 2004 to about 16.2 in 2022, according to the country’s Ministry of Interior (MOI) – higher than London (8.6x), New York (5.9x), Toronto (9.9x), Sydney (11.8x) or Vancouver (13x). Hong Kong is still the world’s least affordable market, with a score of 18.8, according to Demographia’s 2023 International Housing Affordability report.

Taiwan House Price to Income Ratio in Taipei City graph

Nationwide, the house price-to-income ratio stood at 9.6% in 2022, up from 8.58 before the Covid-19 pandemic, based on MOI figures.

Recently, Taipei Mayor Ko Wen-je stressed the urgent need to resolve the country’s affordable housing crisis before it provokes social unrest, similar to the case of Hong Kong.

“[In Hong Kong], high rent and housing prices are causing class struggle, a widening wealth disparity, and accumulating resentment among young people,” said Ko. “Unless the problem is resolved, Hong Kong’s problem today could become Taiwan’s tomorrow.”

To address the problem, Ko announced that the city plans to build 50,000 public housing units in the next seven years.

Over the past eight years, about 200,000 social housing units have been added in Taiwan – 120,000 built by the government and 80,000 from government-sponsored leases.

In early December 2023, Taiwan’s Cabinet approved a new plan to raise the supply of social housing to 1 million units by 2032.

Housing demand was boosted after 2009 when the government cut inheritance tax rates from 50% to 10%, and interest rates were cut. Unmonitored speculation, low housing supply, and a long tradition of homeownership pushed house prices in Taiwan, particularly in the capital city, and especially on high-end properties. A three-bedroom apartment, which cost just TWD6 million (US$191,465) to TWD7 million (US$223,376) in 1995, was sold for over TWD20 million (US$638,217) last year.

From 2000 to 2022:

  • In Taipei City, the house price index rose by 240% (166% inflation-adjusted)
  • In Xinbei, the house price index rose by 289% (204% inflation-adjusted)
  • In Taoyuan, the house price index rose by 332% (237% inflation-adjusted)
  • In Hsinchu, the house price index rose by 322% (230% inflation-adjusted)
  • In Taichung, the house price index rose by 358% (258% inflation-adjusted)
  • In Kaohsiung, the house price index rose by 282% (198% inflation-adjusted)

“Unfortunately, buying a home remains unaffordable for most young Taiwanese, a situation we don’t expect to change in the medium term,” said Emily Dabbs of Moody’s Analytics. An average household in Taipei needs to pay two-thirds of its income for a mortgage loan, far above the affordable limit of 30%.

Taiwan House Price Indices graph

Dramatic measures introduced to curb speculation

Worries about mainland speculators peaked in early 2008 when residential property prices rose by more than 10% y-o-y during the first quarter. Upward pressure further increased when Chinese banks based in Taiwan were able to offer mortgages after the signing of an MOU in November 2009.

From October 2009 onwards, the central bank actively urged banks to closely monitor mortgage lending risks. A big step was to assign a 100% risk weighting to non-owner occupied residential mortgages. Risk weightings for other home mortgage portfolios range from 50% to 80%, compared with 10%-20% for banks in other developed markets in Asia-Pacific that practice the Internal Ratings-Based Approach to credit risk.

In 2011 a luxury tax was introduced. Second homes not occupied by the owner and sold within one year of purchase were taxed at 15%, and those sold within two years of purchase were taxed at 10%.

From March 2014 much tougher measures were introduced which caused house prices in Taiwan to drop 7.9% (3.7% inflation-adjusted) from Q2 2014 to Q1 2016. House prices increased by a minimal 1.8% in 2017 and 1.9% in 2018.

These were the measures:

In March 2014, property taxes on non-owner-occupied residential properties were raised to between 1.5% and 3.6%, from 1.2% to 2%.

Inspections of pre-sale house transactions were tightened. State-owned banks lowered loan-to-value ratios for first-time buyers from 80% to 70%, and to 50% from 60% for people owning more than one property.

On January 1, 2016, a new property gains tax of as much as 45% took effect. Property sellers are now required to pay between 15% and 45% of gains based on market prices, instead of the previously used government-assessed values. Qualified property sellers with gains of less than TWD4 million (US$ 127,845) are exempt from the tax.

However, as the effect of these market-cooling measures wanes, house price growth has accelerated again in recent years. House prices have risen by 7.6% in 2022, following y-o-y increases of 14.6% in 2021, 6.5% in 2020 and 3.2% in 2019.

Because of this, the government has introduced measures that would tax houses and presale projects resold within five years of purchase. Accordingly, under the Amendments to the House and Land Transactions Income Tax 2.0 which came into force on July 1, 2021, a tax of 45% will be paid on gains from the sale of property within two years of purchase and 35% for gains made between two to five years. Foreign individuals and businesses are also required to pay the same amount of tax. According to the Ministry of Finance, the amended holding periods apply to houses and land acquired after January 1, 2016, and sold after July 1, 2021.

FOR INDIVIDUALS:
  Pre-amendment Post-amendment
  Real property holding period Tax rate Real property holding period Tax rate
Resident individual Less than 1 year 45% Less than 2 years 45%
1-2 years 35% 2-5 years 35%
2-10 years 20% 5-10 years 20%
More than 10 years 15% More than 10 years 15%
Nonresident individual Less than 1 year 45% Less than 2 years 45%
More than 1 year 35% More than 2 years 35%
Sources: Ministry of Finance, Ernst & Young

New measures to curb banks’ property exposure

In February 2022, Taiwan’s Financial Supervisory Commission (FSC) raised the regulatory risk weights (RW) and applied for new domestic property loans, in an effort to reduce banks’ property exposure. More specifically:

  • The RW for new housing loans to retail buyers with more than two properties, as well as to corporate buyers, was raised to 50% - 100%, from 20% - 30%, to control speculative property investment.
  • The RW for new loans to finance land acquisition and housing inventories was also increased to 150% - 200%, from 75% - 150%.

“The measures should help to moderate the pace of banks’ property lending and contain concentration risks. However, we do not believe they will result in a significant reduction in the sector’s share of total lending,” said Fitch Ratings. “The latest development follows other policy moves that already helped to moderate the growth in property-related loans in 2021, including stricter loan-to-value (LTV) requirements.”

Then effective June 16, 2023, the central bank announced yet new credit controls on second-home loans by lowering the maximum LTV ratio for second-home mortgages from 75% to 70% in Taipei, New Taipei City, Taoyuan, Taichung, Tainan, and Kaohsiung, as well as in Hsinchu city and county.

After drawing criticism from housing experts and property developers, who commented that the new measures would harm people who need to relocate, the central bank announced in July 2023 that the rule will not apply to those who sell their first home within a year.

Mortgage interest rates gradually rising, amidst key rate hike

In its December 2023 meeting, the Central Bank of the Republic of China (Taiwan) kept the discount rate, the rate on refinancing of secured loans, and the rate on temporary accommodations at their current levels of 1.875%, 2.25%, and 4.125%, respectively. The recent decision aims to support the steady growth of the economy, amidst easing domestic inflation.

The central bank raised its key interest rates five times since March 2022 to curb inflationary pressures. It has also increased the reserve requirements ratio twice to strengthen the effectiveness of its selective credit control measures.

“Going forward, as the recent progress in global disinflation remains clouded by many uncertainties, the Bank will stay attentive to developments in monetary policy moves by major economies, risks to steeper economic slowdown in China, price movements in global raw materials, geopolitical risks, and extreme weather events,” said the central bank in its Q4 2023 Monetary Policy Decision report.

“The Bank will assess their implications for domestic economic activity and financial conditions and adjust its monetary policy in a timely manner as warranted, so as to fulfill the statutory duties of maintaining financial and price stability and fostering economic development within the scope of the aforementioned objectives.”

The average interest rate for housing loans stood at 2.077% in October 2023, up from 1.827% a year earlier and 1.351% two years ago. Despite the increase, it remains very low by international standards.

Taiwan Interest Rates on New Housing Loans graph

New housing loans slowing

As a result of the central bank’s macro-prudential measures, although total outstanding housing loans rose by an average of 5.3% annually from 2009 to 2022, they remained steady as a proportion of GDP, at around 40% of GDP.

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

With gradually rising interest rates, new housing loans are now slowing. During the first ten months of 2023, the amount of new housing loans fell slightly by 0.8% from a year earlier, to TWD 578.07 billion (US$18.46 billion), in contrast to the 5.3% growth in the previous year, according to the central bank.

Taiwan New Housing Loans from 5 Leading Banks graph

Despite this, the total amount of outstanding housing loans in Taiwan continued to increase by 6.2% y-o-y to TWD 9.84 trillion (US$314.25 billion) as of October 2023, according to the Central Bank of the Republic of China (Taiwan). Likewise, outstanding loans for construction rose by 5.8% y-o-y to TWD 3.24 trillion (US$103.35 billion) over the same period.

Taiwan Loans for House Purchase graph

Residential construction activity slowing

The residential construction sector is now showing signs of a slowdown. In the first three quarters of 2023, the total number of residential construction licenses fell sharply by 18.1% to 109,507 as compared to a year ago, according to figures from the Ministry of Interior. 

In Taiwan’s major cities:

  • In Taipei City, residential construction licenses rose by 4% y-o-y to 9,119 in the first three quarters of 2023.
  • In New Taipei City, licenses fell slightly by 0.5% y-o-y to 22,137 in Q1-Q3 2023.
  • In Taoyuan, licenses dropped 23.5% to 14,898 in Q1-Q3 2023 from a year earlier.
  • In Taichung, residential construction licenses fell by 21.3% y-o-y to 19,042 over the same period.
  • In Tainan, licenses plummeted by a huge 55% y-o-y to 7,210 in the first three quarters of 2023.
  • In Kaohsiung, licenses fell by 23.8% to 10,471 in the first three quarters of 2023 from a year earlier.

Construction activity has been continuously rising in the past six years. Residential construction licenses increased by an annual average of 23% from 2017 to 2019, before slowing to an annual growth of less than 7% from 2020 to 2022.

Taiwan Residential Construction Licenses graph

Taiwan’s vanishingly low rental yields

Taipei now vies with Monaco for the lowest yields in the world. Taipei is not a happy place to be a landlord. The owner of an apartment in Taipei will be lucky to realize more than 2% yields, except for the very smallest apartments. Currently, average rental yields in Taiwan hover around 1% to 3.1%.

In Q2 2023, the gross rental yields of Taiwan’s major cities are as follows (based on Global Property Guide’s research conducted in August 2023):

  • In Taipei City, gross rental yields for apartments ranged from 1.39% to 2.18%, with a city average of 1.79%. Smaller apartments have the lowest rental returns.
  • In New Taipei City, apartments generate rental returns between 1.72% and 2.06%, with a city average of 1.91%.
  • In Taoyuan City, rental yields ranged from 1.64% for one-bedroom apartments to 4.35% for bigger apartments with four or more bedrooms. The city´s average rental yield is 2.66%.
  • In Kaohsiung City, apartments yield returns between 1.1% and 2.23%, with a city average of 1.65%.
  • In Tainan City, gross rental yields for apartments ranged from 1.96% to 3.12%, with a city average of 2.66%.
  • In Hsinchu City, rental yields ranged from 1.81% to 2.04%, with a city average of 1.92%.

Such low yields are often a sign of an overvalued market. Given that the Global Property Guide’s figures are for gross rental yields, i.e., do not make any allowance for vacant periods, legal costs, administration costs, cleaning and repairs, rental taxes, property taxes, and other taxes, it is safe to say that landlords in Taiwan earn nothing on their apartments.

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

The Taiwanese economy slowing, and exports falling

Taiwan’s economy grew by 2.32% in Q3 2023 from a year earlier, following a year-on-year expansion of 1.41% in Q2 2023 and contractions of 3.49% in Q1 2023 and 0.68% in Q4 2022, according to the Directorate General of Budget, Accounting and Statistics (DGBAS). While it is the best showing in the past four quarters, it remains lower than the government’s estimate of a 2.54% growth, amidst slowing global demand for electronics. With weak trade, many companies have scaled back investments.

As such, the government recently downgraded its 2023 growth projections for Taiwan to 1.42%, down from its earlier estimate of 1.61% growth. If the economy grows as predicted, it will be its worst performance since 2009. The International Monetary Fund (IMF) is even more pessimistic, projecting a minuscule growth of 0.8% for Taiwan this year.

Taiwan, which is heavily dependent on exports, was seriously affected by the US economic recession in 2008. The economy bounced back in 2010 with spectacular growth of 10.6%. From 2011 to 2019 the Taiwanese economy has grown by an annual average of 2.9%. Despite the Covid-19 pandemic, the economy managed to post a modest growth of 3.4% in 2020.

After registering a strong expansion of 6.5% in 2021, the Taiwanese economy recorded a more moderate growth of 2.4% in 2022.

Taiwan GDP Growth and Inflation graph

Exports, which account for about 60% of the country’s GDP, are now showing signs of a slowdown. In the first ten months of 2023, Taiwan’s total exports fell by 12.9% y-o-y to US$355.09 billion. Total imports also dropped 19% to US$295.44 billion, resulting in a trade surplus of U$59.66 billion, up by 39.3% from a year earlier, according to the Ministry of Finance.

China and Hong Kong remained Taiwan’s largest trading partners, after purchasing US$126.19 billion worth of merchandise from January to October 2023, down by 20.2% from a year earlier. Mainland China and Hong Kong accounted for about 35.5% of Taiwan’s exports.

Overall inflation stood at 2.9% in November 2023, down from 3.05% in the previous month but still up from 2.35% in the same period last year, based on figures from the National Statistics. The nationwide inflation rate averaged less than 1% in 2010-2020, before increasing to 2% in 2021 and 2.95% in 2022.

In October 2023, Taiwan’s unemployment rate fell to 3.41%, the lowest level recorded since December 2000, as labor market conditions continued to tighten.

Taiwan Unemployment Rate graph

Behind China and Taiwan’s tense relations

In the January 2020 presidential elections, Tsai Ing-wen of the independence-leaning Democratic Progressive Party (DPP) won her second term in office, after defeating her major challenger Han Kuo-yu of the mainland-friendly Kuomintang by close to 3 million votes.

The conflict between Mainland China and Taiwan started to escalate in 2016 when Tsai assumed office and became Taiwan’s first female president. One of Tsai’s key economic policies is to reduce Taiwan’s reliance on Mainland China, which accounts for an average of around 40% of the island’s exports every year. Tsai plans to form closer ties with ASEAN.

Mainland China is highly suspicious of Tsai, warning her against any attempt at a formal breakaway. Early in 2016, the Chinese government announced that it had cut off official contact with Taipei. In December 2016, Taiwan sent a blunt message to China by preparing its military forces and stepping up its training exercises to fend off Beijing’s threats.

Taiwan’s relations with China reached a new low after China decided to boycott the Olympic-style sporting event, the 2017 Summer Universiade, which was held in Taipei in August 2017.

In June 2018, the construction of a US$250 million complex that will house the new American Institute in Taiwan (AIT), which serves as the United States’ de facto embassy in Taipei, escalated further the tensions between Taiwan and Mainland China.

In July 2019, the US announced its intent to sell 108 M1A2T Abram tanks and Stinger missiles worth US$2.2 billion to Taiwan, despite China’s demand to cancel the said sale. The weapons deal is a signal to China of US commitment to Taiwan. As an expression of outrage, China said that it would impose sanctions on US firms involved in the weapons sale, as it harmed China’s sovereignty and national security.

In September 2019, both Solomon Islands and Kiribati severed ties with Taiwan and officially recognized Beijing, amidst the latter’s assurance of providing development assistance to these small countries. Then in December 2021, Nicaragua also switched diplomatic recognition from Taipei to Beijing. Other diplomatic allies that have cut ties with Taiwan since Tsai came to office included Burkina Faso, Dominican Republic, Sao Tome and Principe, and Panama.

In March 2023, Honduras became the latest country to sever ties with Taiwan and establish relations with China.

“China stealing our allies, pressuring our international space won’t shrink the distance across the strait and won’t allow for peaceful, friendly development of cross-strait relations,” said Taiwan’s foreign minister Joseph Wu.

Taiwan now has only 13 diplomatic allies left.

China’s campaign to isolate Taiwan extends to minute details. In the past four years, Beijing has been sending warnings to airlines to list “Taiwan, China”, rather than just “Taiwan”, on their websites. In addition, China fined a Japanese clothing company for listing Taiwan as the “country of origin” on packaging.

In recent years, China has also ramped up military pressure on Taiwan through repeated incursions into the latter’s airspace.

In a move to curb Taiwan’s economic reliance on mainland China and forge a free trade agreement with the US, Tsai has recently lifted a long-standing import ban against US pork, despite significant public pushback. Then in September 2021, Tsai signified its intention to join the 11-country trade pact Comprehensive and Progressive Agreement for Trans-Pacific Partnership to strengthen Taiwan’s economic ties with other nations.

Tsai and the DPP have prioritized increasing defense spending, with a record budget of over US$19 billion for 2023, equivalent to 2.5% of Taiwan’s GDP. Despite this, China’s defense spending remains about twelve times that of Taiwan’s.

Relations between Mainland China and Taiwan thawed when President Ma of the Kuomintang Party (KMT) assumed office in May 2008. He vowed greater cooperation with Mainland China and denounced independence for Taiwan, a sharp contrast to his nationalist but corrupt predecessor, Chen Shui-bian. In November 2009, several memorandums of agreement between Taiwan and China on financial cooperation were signed. These gestures reassured investors and home buyers alike. In June 2010, an Economic Cooperation Framework Agreement (ECFA) was signed by Taiwan and China. President Ma also accepted the 1992 consensus, which played a crucial role in lowering tensions with China and boosting cross-strait economic ties.

Ironically, most Taiwanese people favor neither formal independence nor eventual unification with China. Based on a June 2023 survey conducted by the Election Study Center of the National Chengchi University, only 4.5% of the population supported independence as soon as possible, while 1.6% were in favor of unification with mainland China. The rest of the respondents want to maintain the status quo indefinitely with no move towards either independence or unification.

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