EDITORIAL: Confronting the real estate bubble

Mon, Dec 09, 2013 - Page 8

Over the past two weeks, two top government officials have sounded the alarm over Taipei’s housing market, warning that signs of a bubble are emerging. Their remarks appear to show that the years they have fought to curb rising housing prices have been in vain and clearly demonstrate how hard the battle has been.

On Wednesday last week, Minister of Finance Chang Sheng-ford (張盛和) said Taipei’s real-estate market satisfies some criteria of a housing bubble. These criteria include a lower return on rental investment, a higher price-to-rent ratio in the city and an even higher price-income ratio for residential housing.

Chang’s remarks came a week after central bank Governor Perng Fai-nan (彭淮南) said that housing prices in Taipei are extremely high, as the average prices here are more expensive than those in Japan.

However, such remarks are nothing new. Economists and market watchers have been warning of asset bubbles for a long time. Even Taipei Deputy Mayor Chang Chin-oh (張金鶚) spoke of a possible real estate bubble in 2008, when he was a professor of land economics at National Chengchi University.

The question now is whether the government can effectively tackle the problem. What is needed is a concerted effort from various agencies and an effective implementation of financial and monetary tools.

Make no mistake, having introduced policies related to a special levy on short-term property transactions, the registration of actual prices of real-estate sales and the selective credit controls on banks’ housing loans, President Ma Ying-jeou’s (馬英九) government knows very well how damaging rampant property speculation would be. However, housing prices, especially those in Taipei, have continued rising, due to low interest rates and still-strong liquidity in the market. And the increase in prices in Taipei has had a spillover effect in New Taipei City (新北市) next door.

Based on the government’s latest data, a house in Taipei costs the equivalent of 12.4 years of the average salary, compared with an average of 8.4 years in Taiwan as a whole. In New Taipei City, people would have to spend about 9.6 years of their incomes on average to purchase a home, more than the 7.4 years needed in Greater Taichung and 7.2 years in Greater Kaohsiung.

According to economists, an average of five years’ salary is a reasonable price for a house, but an overall rise in property prices in major cities has made this goal increasingly unrealistic.

Last week, Chang said the answer is urban renewal, but the deadlock over the Wenlin Yuan urban renewal project in Shilin District (士林) has demonstrated how complex the urban renewal process is.

Chang seems to forget that it is the years of cuts by the Ministry of Finance in the land value increment tax, inheritance and gift tax and business income tax that has led to a build up of liquidity in the market and generated an M-shaped society in Taiwan, where the rich get richer, the poor become poorer and the middle class is further stretched.

Even though the central bank knows the keys to rising housing prices are low interest rates and ample liquidity, it is in no rush to raise interest rates given the sluggish economy.

Actually, monetary policies need to be rolled out along with effective taxation measures in order to curb rising property prices.

People do not need to hear more talk of property bubbles from government officials, but they are watching closely to see whether policymakers can work out good strategy and have the guts to tackle the problem. It is true that increasing supply could help bring down prices, but taxation measures such as altering the rate of capital gains tax on the sale of real estate would be more effective, if done correctly.