Tue, Aug 19, 2014 page8

• Housing prices demand stability

  • By Chao Wen-heng 趙文衡
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  Housing prices in Taiwan have now reached ridiculously high levels.

  Last year, in a situation that should have been impossible given the objective conditions, the housing price-to-income ratio in Taipei was the highest in the world, although it has recently dropped to second place.

  Such abnormal housing price growth is normally the result of two main factors: speculation and government policy, both of which affect the other.

  Taipei’s population density is far lower than Seoul’s and per capita GDP for the two countries is comparable. Still, the home price-to-income ratio in Seoul is 9.16, far lower than Taipei’s 15.01.

  Last year, housing transactions in Taipei decreased by 30 percent compared with 2010, while prices increased by a huge 30 percent — despite vacancies in Taipei and New Taipei City amounting to about 187,600 apartments. This situation is clear evidence of speculation.

  When then-South Korean president Roh Moo-hyun proposed a real-estate capital gains tax in 2006, he made it clear that he was declaring war on real-estate speculation.

  With Taiwan’s housing price-to-income ratio among the highest in the world, if Taiwanese do not declare a war on speculation, who will?

  When the government announces its policies to combat high housing prices, what it is most concerned about is the effect of these policies on economic growth.

  There is a wealth of studies showing that real-estate prices are not the driving force behind economic growth, that they will not have much of a follow-up effect on the economy and that they will not stimulate other industries.

  On the contrary, real-estate industry growth can easily spin out of control and develop into a bubble, and indeed has had an effect on many financial crises.

  However, even if it does not create a crisis, the excessive concentration of resources in real estate will have a negative effect on other industries, which can lose some of their international competitiveness as a result.

  Consider South Korea as a prime example. In 2006, South Korea introduced a 30 percent capital gains tax on sales of second or third properties, which was increased to 50 and 60 percent respectively in 2007. From October 2006 to May 2007, housing price changes in South Korea fell from an increase of 3.8 percent to a decline of 0.4 percent, while economic growth for 2007 remained high at 5.2 percent.

  In Taiwan, the low housing transaction volume in Taipei demonstrates that prices in the real-estate market are controlled by a minority. Falling prices will not have any overall effect on the economy and this offers a great opportunity for the government to take action in its fight against high housing prices.

  Countries around the world treat soaring housing prices as an evil and try to come up with different measures to combat such developments.

  Germany has even made housing speculation a criminal offense. Article 251 in Taiwan’s Criminal Code criminalizes speculation in grain, agricultural products and other necessary foods and beverages, but does not include housing, which is another necessity. This is beyond comprehension.

  The unreasonable growth in housing prices results only in quickly expanding sales for the real-estate industry.

  This does not do much to drive growth in other industries, and the speculative atmosphere — which will overtake investment — will only aggravate the consistently increasing wealth gap, which in its turn will have a tremendous negative effect on the economic wealth of the public.

  Housing should be treated as a public welfare issue rather than an investment, and the government’s housing policies should give priority to maintaining stable prices, as with other necessities, rather than striving for high growth and returns on investment.

  Chao Wen-heng is an associate research fellow at the Taiwan Institute of Economic Research.

  Translated by Perry Svensson
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