The government needs to come up with new, effective approaches to curb property speculation, as the luxury tax would not be able to prevent a housing price bubble from forming — as officials anticipated two years ago when the law was enacted.
To restrain housing prices, the government started levying a transaction tax on property owners ranging between 10 percent and 15 percent of the housing transaction in June 2011, following the steps of Singapore, Hong Kong and South Korea.
The results fell short of the government’s expectations. The tax has only curtailed housing trading volume, rather than putting a lid on the upward price movement.
Overall housing prices rose at an annual pace of 6.79 percent to NT$278,300 per ping (3.3m2) last quarter, while the price in Taipei soared nearly 20 percent to NT$864,200 per ping, according to the latest survey conducted by Cathay Real Estate Development Co and National Chengchi University’s real-estate research center.
The survey showed that the number of transactions in Taipei halved last quarter, compared with a year ago, even though the total trading volume was little changed nationwide. This is because the luxury tax only targets home owners who sell their homes within two years of buying their properties.
What is worth noticing is that price increases are spreading to areas next to Greater Taipei such as Taoyuan and Hsinchu counties, which are out of the reach of the central bank’s selective credit tightening measures. The bank limits mortgage loans granted to buyers to less than 60 percent of the total transaction, if purchasing a second home in Taipei and Greater Taipei.
Housing prices in Taoyuan and Hsinchu surged about 18 percent in the quarter ending June 30 to NT$204,900 per ping from NT$173,500 per ping in the same period last year, the survey showed.
The continuing rise in housing prices in metropolitan areas indicates that the luxury tax cannot constrain speculative investment as investors still consider property a better investment tool than equity markets because of relatively lower costs and smaller risk.
To effectively curb housing speculation, the government should tighten regulations. The core problem is that investors have massive capital on hand and are seeking low-risk investment with good returns. As there is limited choice on the market, property is considered one of the best investment tools and low interest rates help drive down investment costs. The central bank has kept benchmark interest rates at their lowest levels in two years to drive economic growth.
There are several ways to boost the investment cost. Imposing a new stamp duty for home buyers for a second home should be an option, as Singapore and Hong Kong governments have done.
The mechanism would increase investment costs for speculative property investors, while first-time buyers would be exempted from paying the tax.
To make it more costly to invest in the property market, the government should also consider extending the two-year lock period as regulated by the luxury tax to a three-year, or four-year time frame.
However, those should be short-term measures. In the long term, the government should leave property trading to the market. As part of market mechanisms, the government should speed up tax reform to facilitate the implementation of the proposed transaction tax on home owners based on the market value of their properties.