Worst yet to come for real estate

By Chang Chin-oh 張金鶚  / 

Sat, Dec 29, 2012 - Page 8

There has been a certain amount of wishful thinking of late that, come the new year, the property market will start to emerge from the doldrums. However, is the worst really over? People have perhaps forgotten that during the property slump in the 1990s, more than 200 construction companies went bust, more than 2,000 real-estate brokers closed shop and more than 300,000 families lost their homes through foreclosure. Some sources estimate that the amount of non-performing loans exceeded NT$1.4 trillion (US$48 billion).

The property market sustained a double blow this year, with the introduction of the luxury tax and the resultant fall in housing loans. Transaction volumes fell to a 10-year low — even lower than when SARS dampened investment. The introduction of reporting actual selling prices for property transactions has also revealed a conspicuous decline in property prices, with actual sales going for 10, 20 or even 30 percent less than their purported value. What have been, in the past, very desirable properties — apartments built near MRT stations — have seen their asking prices drop by between 10 and 15 percent, and even then close to half have had no takers.

In other words, following a property boom lasting about eight years — with the exception of the latter half of 2008 through early 2009, when it was hit by market uncertainty caused by the US subprime mortgage crisis — the housing market has been on a downward spiral since the second half of this year, with transaction prices and volumes falling. Real-estate agents are keen to impress upon anyone who will listen that the housing market has already bottomed out and that they expect the coming year will see an improvement in their fortunes, but at the same time they are calling on the government to abolish the luxury tax to relieve the financial friction on the housing market. So what will the next year bring, and what should the government and prospective buyers expect or do?

Several factors support the hypothesis that the housing market will indeed bottom out and bounce back. First, there are signs that the domestic economy is gradually starting to recover, and this will drive demand in the housing market. Second, there is no shortage of foreign or domestic capital, so there is ample cash around to support the market. And third, interest rates remain low, and there is just as much demand for property as before, whether it be for people looking to buy a home or to make an investment.

However, there are also reasons to believe that the housing market dip has just started. The housing market is subject to cyclical growth and contraction, and it has just emerged from eight years of unexpectedly favorable growth: It is only now that the sector has started to contract and to see prices fall. It is very unlikely that the housing market will recover after experiencing only a brief period of decline. There is also the question of supply and demand. While there is no shortage of supply, investor demand has dropped significantly because of the introduction of the luxury tax and a constriction in money supply. People have been holding off on buying houses because of rising prices coupled with stagnating incomes, resulting in a glut of empty properties on the market. Then there is government policy. The luxury tax and the actual selling price reporting policy, as well as announcements of increases in land prices and current value, were all introduced by the government in response to pressure from the public. With these in place, we are unlikely to see conspicuous growth in the housing market in the foreseeable future.

Another reason is financial risk management on the part of financial holding companies anxious about how much capital they have tied up in the property market, which are thus restricting the amount of available money for housing loans. These companies are also worried that the shortage of capital available will result in people struggling to pay their mortgages, and therefore to bad debts, the minute there is an upturn in the housing market. They are therefore limiting the number of mortgages they are approving and raising mortgage rates. Finally, with the transparency of the actual selling price property value reporting, it has become a buyer’s market, unlike in the past, when the market was dictated — or to some extent distorted — by sellers artificially inflating prices. In the future, the asking prices of properties will be more reflective of their actual value.

After taking all these factors into account, what is the general public to expect? Should prospective home buyers assume that prices are not going to drop and think more in terms of sharing apartments with others for the time being? How about investors? Should they take a gamble and buy up properties in the hope that the market will soon bottom out? If those buying for investment purposes think the market will soon improve, they should act. If not, they should hold back for now and avoid bailing out property owners and other investors at their own expense. For those unsure which way the pendulum will swing, the best policy is perhaps to sit tight and watch how things progress and wait until things become more apparent before taking the plunge. Property is, after all, a major purchase, and opting for the wrong approach will have repercussions not just on one’s finances, but on one’s future, too.

And what is the government to do about the housing market, given the unfavorable prevailing economic climate and a GDP growth rate that might not even reach 1 percent this year? Past academic research has shown that the real-estate market cannot be relied upon to be an economic driver. It would therefore be inappropriate to divert preferential subsidies to the housing market. To do so would do nothing to stimulate economic growth, and it would devote too many resources to that sector and result in large amounts of unused properties, wasting resources that could be better spent elsewhere and denying them to other sectors, thereby contributing to further recessionary pressures. The government would be well-advised to take this opportunity, when the housing market is at a turning point, to take steps to promote long-term, systemic stability in the sector, including strengthening the rental market, undertaking ongoing housing tax reform and providing adequate investment channels. Not only will this ensure that the housing market gradually settles down to a sustainable level, it will also prevent the emergence of a property bubble that would only be more bad news for the economy.

A new year is starting and with the housing market as it is, there needs to be a general recognition that the market and property prices are currently at unreasonable and, ultimately, unsustainable levels. If the government continues to hold back on reform, it is going to be very difficult in the coming years for young people to get on the first rung of the property ladder, or indeed be able to afford to rent a decent apartment of their own at all. The middle class will also be stuck in the property that they already own, unable to move further up the ladder, a state of affairs that will be detrimental to all.

This is a critical moment and prospective buyers who have the intention and wherewithal should be careful before they enter the market. At the same time, comprehensive information about market supply and demand should be made available, and not distorted, and the government should be required to take action to strengthen the market. If all of these things are done, there is no reason the housing market should not return to more reasonable levels over time.

Chang Chin-oh is a professor in the Department of Land Economics at National Chengchi University.

Translated by Paul Cooper