The central bank’s interest rate cut last week was in line with market expectations, but its relaxing of certain home mortgages and property loans has received mixed responses about the move’s effects on the housing market.
On Thursday, the central bank cut its policy rate by 12.5 basis points for the third consecutive quarter to help boost the nation’s export-reliant economy in the face of weak domestic and foreign demand. The move also aims to curb the influx of hot money as the bank tries to maintain stability in both the New Taiwan dollar’s exchange rate and in the financial markets.
Meanwhile, since its selective “macro-prudential” measures for the property market have proven to be effective since their introduction in June 2010 and it has seen speculative demand in the sector taper off after the introduction of several taxation schemes by the government, the bank said it has decided to loosen the restrictions on mortgage caps for houses in Taipei and 15 “popular” areas in New Taipei City, as well as for people making their third property purchases, corporate residential purchases and land loans.
However, the bank said that mortgage restrictions for “high-value” homes would remain in place.
Still, despite all the work the bank has done so far, there are concerns as to whether the flagging economy would find the support it needs from the bank’s continuing monetary easing in terms of exports, domestic consumption and private investment.
Nonetheless, as the nation’s challenging fiscal situation and the increasingly rigid budget allocation have largely limited the scope of the government’s stimulus plan aimed at boosting aggregate demand, the bank seems to have no choice but to push for more easing in the coming months.
On the other hand, the bank’s relaxation of mortgage rules signals that the risk posed by a housing bubble is subsiding and the financial stability of the domestic banking system is intact due to improved risk management of housing loans. It also sends a message to potential home buyers that they can consider entering the market in easier credit conditions. While it might appear reasonable for the bank to boost the housing market and eventually lift the economy, the important question is: Are housing prices fair and reasonable?
The declining number of housing transactions in the past several quarters was affected by a spate of unfavorable policy measures. However, it also reflected a continuing standoff between sellers and buyers. Property prices in Taipei and New Taipei City have been declining in the past few months compared with their recent highs, but they do not yet indicate a sharp correction. So far, corrections of 5 to 10 percent in some parts of Taiwan have failed to attract potential buyers, who are generally looking at adjustments of up to 15 percent or even 20 percent.
Although the relaxation of mortgage rules represents a relatively small adjustment in the bank’s “macro-prudential” measures, it confirmed the suspicion that the central bank is not worrying about the housing market and does not want to add downward pressure on the economy, which faces many structural problems and uncertainty over cross-strait relations.
However, price corrections are just a matter of time and buyers with real demand will continue staying on the sidelines if sellers cannot make greater price concessions.
If the housing market has, either voluntarily or involuntarily, gradually been moving toward a sweet spot that both sellers and buyers can accept, the bank’s relaxed mortgage restrictions, coupled with lower interest rates, would offer sellers some breathing room. This would allow them to become inflexible over their pricing strategies and might lead to a lingering standoff with buyers.
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