The new "government for all the people" has recently made two apparently unrelated policy decisions. The first is to postpone the construction of the Meinung Dam (美濃水庫) and delay a final decision concerning it until 2009. The second is to draw up a NT$340 billion housing loan package to stimulate the real estate market. While the two policies are ostensibly unrelated, they share a day trader's style of decision-making.
The dam was designed to resolve water shortages in the Kaohsiung area. After scrapping the project, the new government plans to alleviate the shortages by channeling water into the Tsengwen Reservoir
This kind of day trader attitude and short-term decision-making mode are not traits public policymakers should have, but they seem to fit in very well with the new government.
The same is true with the stimulation package. The real estate market has been in the doldrums for years -- basically because of a serious oversupply of housing. According to an estimate by the Real Estate Investment Association of Taipei
These empty houses are holding up an estimated NT$840 billion to NT$1.12 trillion of capital from banks, while developers have to pay NT$67 billion to NT$112 billion in annual interest. No wonder many development companies are sounding finanacial alarms and the non-performing loans ratios remain high in the banking industry.
Of course, the doldrums besetting the real estate market has spawned many serious problems. But no matter how serious an economic problem is, the solution to it should not run counter to basic economic and market principles. Since the problem is caused by a serious oversupply, the market will naturally balance itself once real estate prices fall to a reasonable level.
What the government should think about is whether there are any systemic factors preventing the market's price mechanisms from functioning. Then the government should apply medicine to the sore spot -- eliminating the factors that have kept the number of surplus houses so high after the market has been in the doldrums for so many years.
But the stimulation package will do exactly the opposite and is a futile attempt to delay the market correction process. Through the credit guarantee system, the government hopes to allow consumers to buy houses with 10-percent down payments and provide interest subsidies to boost buyers' interest.
These two measures may help developers sell a portion of the surplus housing, but they may also create two very serious side effects. One, encouraging people to buy houses even though they may not have the ability to repay the debt increases the loan risks of banks. Lowering the down payment ratio to 10 percent would lower the threshold for house buyers, but in actuality would not reduce the burden of repayment that come after the purchase.
In other words, these two measures encourage people to embark on high-caliber, high-risk consumer activities.
Secondly, the two measures provide incentives for developers to obtain the loans through dummy accounts, then stop paying interest and let the banks take over the houses. So it is possible that the problems will just be shifted to the banks, consumers and the government.
Chen Shui-bian
In the banking sector, this kind of politician and this kind of government would have long become a financially untrustworthy person.
Hwang Jyh-dean is an associate professor in the international business department at National Taiwan University.
Translated by Francis Huang
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