Taiwan Wrestles With Burgeoning Housing Bubble
Shanghai, Beijing and Hong Kong aren’t the only cities in the greater China region contending with politically problematic property bubbles. Housing prices are becoming a headache for authorities in Taipei, as well.
While property prices on the rest of the island are fairly manageable, prices in Taipei and surrounds have taken off, with home prices rising 9.13% on-year in the second quarter of the year. The average home price is now more than 11 times the annual household income of an average person.
That is partly because Xinbei City, the area surrounding Taipei and Taiwan’s largest metropolitan area by population, is filled with people who have moved there to work in Taipei.
There are both economic and political implications: The property price boom will feed through to the broader economy in some measure via inflation. And in 18 months, when presidential elections roll around, many of Xinbei City’s 3.9 million residents and Taipei’s 2.6 million residents–in total more than one quarter of Taiwan’s population–may vent their anger at the ballot box over declining home affordability.
For the Kuomintang-led government, those issues will color its reaction to the property boom.
So far, the pace of interest rate hikes and tighter rules on mortgage lending lack the fire-power needed to bring property prices down sharply.
But bring out the big guns, like aggressive rate hikes, capital controls or strong administrative steps, and the government could damage the broader economy at a time when demand is still fragile. That in turn could draw an electoral backlash potentially bigger than a backlash over high property prices.
Given the large amount of liquidity heading into emerging market economies right now, some analysts argue it’s wiser not to fight the bubble. The more pragmatic path, they say, would be to keep a bubble in check to prevent a spillover effect on property prices elsewhere in Taiwan. The central bank is widely expected to raise the benchmark discount rate another 12.5 basis points to 1.625% later this month; it raised rates 12.5 basis points each in June and October. The government is also considering imposing a tax on properties sold within a year they are bought and possibly another tax on gains from selling luxury apartments, and the measures could be launched as early as the first half of 2011.
Managing a bubble via such moderate action would be important. Around 40% of Taiwan’s bank loans are property-related, the Asian Development Bank says. Allowing a bubble to balloon or burst suddenly could hurt banks and the wider economy. Take the case of Hong Kong: Its property prices have been rising for years, buoyed by funds from mainland China. Authorities have rolled out various measures but shied away from aggressive action that could have widespread economic side-effects.
Taipei’s predicament isn’t much different.
–Paul Mozur
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