Home prices are likely to fall by between 5 percent and 10 percent over the next two years, due to oversupply and falling affordability, Taiwan Ratings Corp (中華信評) said yesterday.
However, the nation’s major property developers and commercial banks can survive the downturn unharmed given their conservative leverage, the agency said.
“Taiwan’s overheated property market looks set to cool down, with residential prices likely to drop 5 percent to 10 percent in each of the next two years,” Taiwan Ratings analyst Raymond Hsu (許智清) said.
The local arm of Standard & Poor’s expects activity in the commercial property sector to remain stagnant over the same period, with rental yields holding stable, despite low trading volume.
Excess real-estate supply along with government measures to curb speculative property investment are putting downward pressure on prices, which might have a negative effect on the credit profiles of property developers and brokers, as well as financial institutions, Hsu said.
High housing prices are also unsustainable because housing has become increasingly unaffordable for the majority of the population, particularly in large urban areas such as Greater Taipei, the agency said.
The ratio of housing price to income surged to 15.2 last year in Taipei, compared with 8.7 in 2008, when the global financial crisis struck, while the ratio climbed from 7.8 to 12.8 for houses in New Taipei City, Hsu said, citing government data.
The values are higher than Singapore (5) and Japan (4.4), but lower than Hong Kong (17) and Beijing (15.6), he said.
Mortgage burdens constitute 67 percent of disposable income for residents in Taipei and 54 percent in New Taipei City, way higher than the 30 percent Taiwan Ratings views as healthy, Hsu said.
“As a result, we believe the correction pressure is heaviest in Taipei and New Taipei City,” he said.
Excess supply will also help dampen house prices, with vacancy rates nationwide reaching 10.5 percent, Hsu said, adding that the figure might not drop much in the next one to two years given the increase in new home construction projects and newly completed houses.
However, the nation’s low interest rates and loan-to-value ratios should prevent massive defaults or acute selling among homeowners, Hsu said.
Similarly, major property developers have sufficient capital buffers to ride out a modest price fluctuation, with support from low borrowing costs and continued access to bank financing, the agency said.
The central bank is likely to keep policy rates unchanged in the next 18 months, with GDP growth targets of 3.3 percent this year and 3.4 percent next year, Standard & Poor’s forecast.
The local banking system has adequate credit controls to offset a home price correction of 20 percent, thanks to conservative loan-to-value ratios averaging between 50 percent and 60 percent, Hsu said.
The sector’s overall exposure to the housing market declined from 32.5 percent in late 2009 to 27.6 percent in March as lenders retreated from expensive mortgage operations, he said.
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