Sun, Feb 27, 2011 - Page 8 News List

EDITORIAL: Playing to the public gallery

The government’s announcement last week that it was planning to propose a new luxury tax, most notably a special tax of 10 to 15 percent levied on real-estate that is re-sold within two years of purchase, has been well received in the court of public opinion as a sign that policymakers are finally taking action to deter rampant property speculation.

However, a number of important questions remain unanswered: How seriously is the government looking at the issue? How prepared is it to tackle the problem? Will the measure work as anticipated?

Optimists have said the tax will help to discourage speculative investment and drive down property prices, as speculators rush to sell property before the measure takes effect, possibly in the second half of the year.

Pessimists, however, claim that the measure will have only a short-lived impact on the property market. They believe prices are likely to remain high or even rise as a result of supply shortages over the long run, because investors with deep pockets might prefer to delay sales for more than two years.

Indeed, government efforts to curb rising property prices since March last year have resulted in only a slight decline in the sale of existing houses, while prices in general have not changed much. Ultimately, it is the balance between supply and demand that decides prices, and that balance is subject not only to government intervention, but also broader macroeconomic factors.

The reason why property prices are high in Taiwan, especially in the Greater Taipei area, is because the real-estate sector has experienced a boom in the wake of the recovering economy and the relatively low interest rate environment.

At the same time, the government’s reduction of the inheritance tax and the US Federal Reserve’s second round of quantitative easing have ensured ample market liquidity and indirectly led to an influx of speculative capital into Taiwan.

Have these macro factors changed? That seems highly unlikely. First, although the economy will not grow as quickly as last year, it is still certain to grow. Second, even though the central bank is widely expected to continue raising interest rates over the coming months to pre-empt inflation driven by the rise in raw material and fuel prices, this is almost certain to be incremental given the bank’s declared concern over the underlying strength of the economic recovery.

Third, as long as Taiwan’s property market continues to offer good investment returns, it will attract investment. If the current exit of speculative capital from emerging markets due to political turmoil in the Middle East and North Africa proves temporary, and the US engages in another round of quantitative easing, speculative capital will return to the real-estate market sooner or later.

Another concern is how the government can claim to know the real transaction price between buyers and sellers, when real-estate information in this country lacks transparency. Without a benchmark for the calculation of a fair tax, it is too early to say that the luxury tax will deter speculators, let alone detect tax cheats.

Finally, the public might reasonably wonder about the implementation of the tax, as the draft bill must first pass a legislative review.

While housing affordability and the wealth gap have become hot topics ahead of the legislative elections to be held this year or next and the presidential election next year, lawmakers generally prefer to cut taxes rather than raise them in an election year. It remains to be seen if the government will yet succumb to such pressure.

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