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.
Second, there is the issue of land that is not changing hands. Low interest rates, the low tax burden and other low holding costs motivate owners, who are naturally unwilling to sell at a loss, to hold on to their land. These kinds of large-scale price falls cannot be factored into the formula as can be done in stock markets and it is this that has caused the long-term trend of rising urban land prices.
Furthermore, the slow rate of transactions in depressed urban areas makes it impossible to detect how far land prices have fallen. For example, about 20 years ago, rent in then-Taichung City’s Central District (中區) was on a par with Taipei, but now it is not even one-10th of what they were at their peak. However, the index does not reflect this change at all. In view of this, index users might suspect that the government is intentionally reporting the good news about land prices while burying the bad.
Third, although costs have a significant impact on prices, the final deciding factor is still supply and demand. While the land price index keeps going up, its reference value is dubious. In a situation where there are currently over a million properties lying vacant in Taiwan, there is a big question as to whether it can be deduced from this rising index that house prices will go on rising in future. This is certainly an issue worthy of further investigation.
As an analogy, when flying between cities in Taiwan and China, one can either take a direct flight or transfer via Hong Kong or Macau. Although transfer flights involve higher fuel costs, direct flights are the more expensive of the two options, the reason being that the demand for direct flights is greater. Similarly, one should be wary when referring to the land price index, because the problem of excess supply in the real-estate market should also be taken into account.
Finally, when the government tenders land out for sale, it should review its policy of always awarding it to the highest bidder. Although supply and demand is the key determinant of prices, costs are still an extremely important factor. In the future, one thing the government could do is factor in a public rental housing provision as a reference criterion for tender awards. This would allay the problem of property prices being pushed up by land costs, while also helping to reduce the shortage of public rental housing.
Given these potential benefits, this idea is worthy of consideration by the government in deciding its future policy adjustments.
Lin Tso-yu is a professor of land economics at National Chengchi University.
Translated by Edward Jones
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