Premier Liu Chao-shiuan (劉兆玄) has proposed measures to boost the real estate market, including an offer of NT$200 billion (US$6.2 billion) in preferential mortgage loans by the central bank and increasing interest rate subsidies to 0.625 percent. This, however, is not the right way to deal with the issue.
The mortgage policy is based on the assumption that many people want to buy a house but cannot borrow enough money from the bank or else fear that interest rates are too high and that they won’t be able to cope.
Yet if we examine a few figures, we will find that there is a great discrepancy between the actual situation in the real estate market and the Cabinet’s understanding of it.
Central bank statistics show that there is still more than NT$110 billion remaining in preferential mortgage loans and that only NT$300 million to NT$400 million of this is loaned out each month.
In addition, the total amount lent by commercial banks still falls far below the statutory 30 percent cap on a bank’s funds that are committed to housing loans.
In other words, banks still have sufficient cash for mortgage loans. This shows that the problem has nothing to do with the public being unable to borrow money.
Is the problem, then, that interest rates are so high that they prevent the public from buying a house?
The fact is that some banks have offered interest rates that are 0.25 percent lower than the government’s preferential mortgage loans, but there has still been only limited growth in such loans. So the answer is no.
The real problem is that house prices are too high and incomes too low. If incomes increased with house prices, then at least some people would be able to borrow, or consider borrowing, money to buy a house.
Yet, in reality, with increasing domestic inflation and soaring commodity prices — the Consumer Price Index rose from 4.97 percent in June to 5.92 percent in July — not only did incomes not rise, but inflation also caused real income to see the largest negative growth in 20 years.
The second-largest drop of the indexes in the Consumer Sentiment Index survey for last month — conducted by the Research Center for Taiwan Economic Development at National Central University — was the expectations index for household finances over the next six months.
If more and more people think incomes will not increase or may decrease in the next six months, how could they even consider buying a house?
The survey also showed that the Durable Consumer Goods Index, which is closely linked to the real estate industry, dropped by 1.5 points to 97.65 points last month. These are reflections of the public’s conservative approach to purchasing a house at this time.
The Cabinet has made a mistake in its economic measures that aim to revive the real estate market by failing to clearly understand the real problem. The problem is not the policy itself, but a complete misreading of the situation by the premier, his ministers and their advisers.
Lu Chun-wei is a research fellow in the Department of Finance and Economics at Taiwan Thinktank.
Translated by Ted Yang
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