On Thursday last week, the former Dean Department Store in Neihu was sold for a record sum. Then, on Friday, commercial real estate in Sinjhuang City’s sub-center was auctioned off by Taipei County for a price unprecedented for a comparable piece of land in that area. What lies behind this emerging trend?
First, property prices in the Greater Taipei area have been rather volatile over the past few years. Prime real estate prices have soared, as have the premiums on newly built communities, while interest in non-metropolitan districts has fallen.
It’s like speculators pushing up the stock price of companies they believe will pay dividends in the long-run. We see something very similar in the phenomenon of investment in penny stocks of traditional or unknown companies.
Second, if you drive around the Greater Taipei area you will find it’s like one big construction site, with bank ads everywhere calling for investors to climb on board.
On any given weekend, or in the evenings, you see real estate agents rushing back and forth, busy as bees. Yilan, on the east coast, is a beautiful location, affording wonderful vistas of ocean on one side and mountains on the other. However, go there, and all you see are foreclosures.
Why? Well, the main reason is that the market has been distorted for some time now by domestic policy.
Basically, Taiwan has relied on foreign trade and exports for its economic growth for many years, while domestic demand has been driven by real estate. This has meant that the government has been happy to maintain the exchange value of the New Taiwan dollar at a low level and keep interest rates down.
When there is an influx of foreign investment, the capital surplus tends to flow into the property market in metropolitan areas.
Now, with the recent signing of the Economic Cooperation Framework Agreement (ECFA) intimating a thawing of cross-strait tensions, and the possibility that the dam holding back huge investment from across the pond is about to burst, one can see why the market is starting to get all worked up.
Another factor is the lack of possible investment alternatives. While it is true that living on a small island does breed a certain degree of provincialism, one must also concede that buying property is not an unreasonable way to protect the value of one’s investment. One could invest on the international markets, but just look at the way the price of precious metals has shot up in recent years.
As a pure investment decision, there is still a lot of room to make money from speculating on prime real estate in the Greater Taipei area, the value of which can yet increase.
However, other considerations exist not least that of public interest. There are legitimate concerns that if this situation is allowed to go on unchecked, it will widen the gap between rich and poor further, and restrict social mobility even more.
The efforts by central bank Governor Perng Fai-nan (彭淮南) to control excessive market speculation to protect the value of bank assets are of course laudable. However, we should also appeal to the general public’s own values and financial sense. Forget about where other people choose to live, or what kind of property they decide to buy.
Of course, people who live in luxury housing stand to see their nominal assets increase in value, but there are also quite a number of risks involved with price fluctuations. There is no reason to suppose they are necessarily better off by doing so.
There might not be as much cachet in saying that you live in one of the new developments outside the metropolitan areas, but at the very least they do offer a better environment and quality of life.
In a free, democratic society, the government is there to protect market mechanisms, not to allocate resources. It should ensure that all mechanisms operate fairly and that market information is freely available.
Finally, it is responsible for making adequate resources available to ensure a stable housing market. When you are talking about a small island with a residency rate of over 85 percent, speculation on the property market can only lead to more problems.
Considering the record prices being asked for property in metropolitan areas, something the public finds cause for concern, I would like to proffer an objective solution. Why not just choose the type of property that suits your family and go for it, whether you are renting or buying. It will make things a lot easier for you.
Shih Kuang-hsun is chairman of the Department of Banking and Finance at the Chinese Culture University.
TRANSLATED BY PAUL COOPER
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