Central bank Governor Perng Fai-nan (彭淮南) on Thursday announced new policy measures to regulate home mortgage and property loans, which include an expansion of the scope of administrative areas in New Taipei City and Taoyuan County, a cap on the loan-to-value ratio on third home purchases and a revised definition of what constitutes luxury housing.
Lowering the loan-to-value ratio on high priced homes and on housing loans taken out by corporate entities are part of the latest raft of “macro-prudential” measures aimed at cooling the housing market. These actions represent Perng telling the public to be cautious about the risk posed by a housing bubble that could end up bursting and hurting the financial stability of the banking system.
At a press conference held after the bank’s quarterly board meeting on Thursday, Perng also warned that rising property prices would worsen income inequality and generate a negative impact on private consumption.
The central bank has implemented selective credit control measures on certain administrative regions since June 2010. However, prices remain high and speculative property transactions have spilled over to nearby areas. Some banks have also not exercised the self-discipline needed to enhance their risk management of housing loans in those regulated regions.
According to a press statement issued by the central bank on Thursday, there is still a disproportionally large share of “single borrowers with multiple mortgages” in banks’ loan portfolios, suggesting that harsher actions are required to stop investors from using credit to finance property hoarding.
Maintaining low inflation and safeguarding the market’s financial stability are the objectives that anchor the central bank’s monetary policy. Like other central bankers around the world, Perng is wary of using monetary policy to achieve the financial authority’s goals without derailing the economy’s still-weak recovery, but what policy should he apply to an economy in which the inflation outlook remains contained, but the financial sector’s stability could be weakened by rampant property speculation?
Perng’s answer to this is a separation of the central bank’s interest rate policy and macro-prudential policy. He said that while monetary policy instruments such as interest rates are more useful in achieving price stability, selective macro-prudential measures can be more effective in safeguarding financial stability.
The bank’s new round of macro-prudential measures remain rather modest. Even though this time, it introduced a maximum loan-to-value ratio ceiling of 50 percent on new mortgages, this only applies when an individual purchases their third home or more.
While lenders were told to adjust downward their loans to buyers who wished to borrow money for high priced homes, only 28.5 percent of residential properties nationwide are bought with loans, which means that there are relatively few mortgage loans for expensive homes and only would-be homeowners without deep pockets are likely to be impacted by the new measures. The bank’s macro-prudential measures to rein in housing credit still have their limits.
High home prices are hardly a new theme for policymakers, but hearing Perng say that the sound development of the housing market must rely on more effective policy efforts by the relevant authorities belied the governor’s concern over the issues of housing affordability and wealth inequality. It also signaled his desire for concerted action from other government agencies to keep a check on demand, supply and institutional arrangements.
The Ministry of Finance has come up with measures to curb housing speculation, including a higher tax on residential properties not occupied by their owners. Yet, these may be just a prelude to even tougher actions in the future that will aim to further regulate the market, such as stricter controls over capital inflows and rasing the costs of holding onto property.
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