Sat, Jan 24, 2015 - Page 8 News List

Price index is unreliable indicator

By Lin Tso-yu 林左裕

The latest national urban land price index published on Thursday last week reveals a 25 percent rise in prices compared with six months ago, with the six special municipalities and 16 counties and county-level cities all displaying an upward trend.

The strange thing is that Taipei’s used-property price index has fallen by 5 percent over the same period. Furthermore, compared with last year and the year before, the number of foreclosures in Taipei and Greater Taichung has bottomed out and started rising again. During the same period, there were more than 1.6 million properties recorded as unused, meaning that they are vacant residential properties or “hoarded” real estate that has neither been rented out nor sold.

Statistics show that total state-owned vacant and unused land reached 83,000 hectares, of which more than 8,000 hectares is land that is allocated for construction, but is either unused or underused, with more than 520 hectares in Taipei. The quantity is more difficult to estimate for land that has been tendered out after being expropriated by local governments and is now in the hands of the private sector.

Prices have risen in spite of this excess supply. Sales of finished products — residential properties — have been sluggish and in some cases prices have even fallen, while the cost of land has continued rising. This peculiar phenomenon represents a contradiction in economic theory, and has also left property buyers and investors unable to fathom what is really happening in the market, while the government has failed to come up with a coherent set of housing-policy measures in response.

The national urban land price index, which is published every six months, is compiled by examining actual urban land transaction values in residential, commercial and industrial zones in built-up areas of Taiwan’s 325 townships and cities. A range of high, medium and low land price samples are gathered from each region and these are compiled into an index by applying certain mathematical formulas.

Although the sampling and compilation techniques might seem logical, there are some hidden problems in the process, as well as pitfalls when the index is applied, and it would be a good thing if readers and policymakers could get a thorough understanding of these issues.

The first problem concerns the sampling. The samples used are actual transaction values, and they take the highest winning bids after governments have expropriated land from private owners as the criteria for price calculation. This method of market price comparison, which uses a limited number of transactions as representative of all land deals, will often result in deviation from fundamentals, such as rental revenue. Moreover, it is also a lagging indicator, meaning that it lags behind long-term trends and can therefore confirm, but not predict them.

Furthermore, in recent years the subprime mortgage crisis has been followed by policies of quantitative easing and low interest rates, along with a low tax burden and luxury taxes. These constraints have made owners reluctant to sell their properties, and this has become a serious problem. Reduced supply in the property market has led to a situation of reduced transaction volumes and simultaneous price increases. However, in the past year there has been a gradual shift toward falling prices alongside a continued decline in transaction volumes. The gradual increase in foreclosures is a sign that some investors cannot hold out any longer under such conditions.

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