Members of the Federation of the Real Estate Development Associations (FRDA) met Premier Liu Chao-shiuan (劉兆玄) on Nov. 25 and proposed eight measures aimed at boosting the ailing property market.
While the measures are based on the right intentions, the proposal to extend the validity period of building permits by two years and the government’s proposal to guarantee 10 percent of loans for home buyers to raise the loan-to-value (LTV) ratio are problematic.
As far as the validity period for building permits is concerned, there is a risk that it would prolong the real estate slump.
The measure would benefit construction companies that have obtained building permits but have difficulties getting started.
However, a mechanism would be needed to prevent construction companies rushing to grab new building permits — for example, companies that are sitting on land but don’t have building permits.
It is also unwise to rely solely on government loan guarantees to raise the LTV ratio. Although this would lower the threshold for down payments, it could easily trigger a fresh wave of non-performing assets.
Between 2001 and 2002, when domestic banks were troubled by sizeable non-performing assets, most arose from house values falling below their mortgage balances, which presented a moral hazard for borrowers who failed to make their payments and thus breached contracts.
It would not be impossible in today’s market for housing prices to drop 20 percent. The LTV ratio guaranteed by prices may be too high, so that falling house prices would lead to a negative net value of a borrower’s house — as prices are lower than mortgage balances — and banks would again be troubled by non-performing assets.
With default rates on the rise, the government must prevent the repercussions of this kind of policy. If it wants to boost the domestic property market, it might as well act more aggressively if it is going to violate the market mechanism anyway.
If the government considers extending building permits, it should adopt complementary measures to control the issuance of new permits and be more aggressive in reducing the number of new permits to prevent market prices being affected.
If it wishes to raise the guaranteed ratio, it should also ask construction companies to lower prices, since, considering average construction costs, there is still room for price cuts.
Another way would be for construction companies to match loans so that both parties share the risk. This would ensure fairness and stability.
It may not be easy for small firms or companies with low cash flow to offer loans to home buyers, but a company must take on a certain amount of risk in its operations.
Some construction companies build houses with a debt ratio of 90 percent, while other companies have a debt ratio of 70 percent. When a crisis occurs, we cannot save every company and some must be allowed to fail, especially when it seems clear that we are about to enter an era of deflation and commodity prices may continue to drop.
Construction companies have often raised prices under the pretext of increased raw material costs, so they should lower house prices when raw material prices fall.
If home loans should be guaranteed, that policy should work in tandem with bank credit. Those with good credit ratings, such as the nation’s 500 largest enterprises, military officers, public servants, teachers and professionals — including accountants, lawyers and doctors — should be eligible for a 10 percent government loan guarantee.
Those with poorer credit ratings should be given a lower loan guarantee or be refused.
In this way, not even 90 percent would lead to a great risk of defaults on loans. It would also prevent unscrupulous construction companies being given loans by creating dummy accounts.
The goal is boosting the economy, so this is different from offering preferential interest rates for disadvantaged groups. Focusing on disadvantaged groups is a matter of social welfare, while revitalizing the economy requires the government to encourage those with resources to spend.
The middle class and those selling their homes to buy new ones should play a key role in the government’s plan to rejuvenate the economy. Those who cannot afford to buy a house would be better helped by a rental subsidy scheme.
Finally, the government should take the opportunity to demand that the construction industry also help the market.
The FRDA should publicize the number of houses for sale and how many houses are being built in each area. With more transparent information about the sector, buyers will be better informed on when to enter the market. This will help the market bottom-out and recover faster.
Yang Chung-hsien is an assistant professor in the Department of Real Estate Management at the National Pingtung Institute of Commerce.
TRANSLATED BY TED YANG
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