From 1996 onward, incomes for ordinary Taiwanese have stagnated. All other things being equal, this would result in negligible momentum to drive up property prices. What we have seen, however, is that property prices have not readjusted as might be expected and actually remain high.
The public’s income is usually generated from the domestic (closed) economy, and you would not expect the present average per capita income to support the high property prices we are seeing. At present in Taiwan, however, incomes are not generated entirely from the domestic economy — the overall picture also includes incomes coming into the country from the global (open) economy. As a result, any effort to prevent an imminent bursting of the property bubble by looking only at average per capita domestic income will fail to address the actual circumstances.
In an open economy, the average income figure combines domestic income and income from abroad. Although our domestic incomes have not increased — and indeed have fallen — over the last dozen or so years, income earned overseas has actually increased.
Unfortunately, this is also the cause of the stagnation of per capita domestic income. The conventional wisdom is as follows: Given the stagnation in the average income, there should not have been much potential for major inflation in the property market in Taiwan, and one would have anticipated a burst in the property bubble by now. However, this theory is not borne out by the current trends in the price of real estate in Taiwan. Why should this be?
We know from the central bank’s balance sheets that net income from abroad has gradually increased year-on-year, from US$66 million in 1982 to US$4.36 billion in 1990 and US$4.47 billion in 2000, jumping to US$15.34 billion last year. The figure of US$114.3 billion — the combined total for the period 2003 through last year — is approximately equivalent to NT$3.43 trillion. It follows that, given the stagnation of domestic income, if the additional income from overseas earnings as well as the mass inflow of foreign capital — including the Chinese capital that comes into the country via various channels — is invested in domestic real estate, it stands to reason that the prices would, far from coming down, actually increase, and these inflated prices would be supported by the market.
Simply put, we have a situation in which property prices continue to rise, even by a considerable degree in the major metropolitan areas in the north and the center of the country, even though average incomes for ordinary people have stagnated.
In addition, house buyers using income earned overseas and foreign capital actually spend the majority of their time abroad, meaning that many properties are left empty.
At 20 percent, the housing vacancy rate is higher than in many other countries in Asia — the figure is 14 percent in Japan, 7 percent in Singapore and only 5 percent in Hong Kong.
This shows that, compared with other countries in the region, Taiwan is not steering capital investment into more efficient areas, meaning that capital is either misdirected or underused.
It follows that should there be a rapid exodus of foreign capital from the domestic property market, there will be a danger of the property bubble bursting.
The relevant authorities should, therefore, as a matter of priority, devise effective measures to restrict or otherwise divert foreign capital, to ensure that the problems in the domestic property market do not lead to social disaster.
Chen Chiu-wen is an adjunct assistant professor at the Chinese Culture University.
Translated by Paul Cooper