Just as the housing market is beginning a downward turn, the central bank announced, without warning, that it was relaxing controls in some areas of New Taipei City and Taoyuan, and that it would provide more capital to investors who already own two houses and want to buy more, wealthy people who want to buy luxury apartments and those who want to invest in housing as a corporate entity.
Although this policy might seem to have limited potential impact, the message sent by the announcement must not be ignored and should be treated seriously.
The announcement gives rise to several questions.
First: Has the development of the housing market been reasonable? Is the downward trend inappropriate? Are current housing prices acceptable to the general public? Should prices continue to drop? Is the shrinking number of transactions a result of a lack of capital or a result of prices being unreasonably high?
Second: Will the downturn continue or lower the risk of financial institutions? If it increases risk, should credit and loans — in particular for investors and particular investment areas — be tightened, or should they be relaxed?
Third: It is common knowledge that neither the macroeconomic nor the investment environments are good at the moment. Will past speculation and the unreasonable development of the housing market have a positive or negative effect on the economy as a whole?
The housing market has absorbed a lot of capital, which has driven prices for residential housing and land for productive uses higher. This has resulted in large volumes of unused housing and land. Is this having a crucial impact on the overall economy and the investment environment?
Has long-term unsound development of the market distorted and harmed the economy, and if it has, has this distortion and harm been severe? Has the wealth gap increased as a result and created social problems?
It should not be difficult to find the answers to these questions. It is clear that the unsound housing market and unreasonable housing prices lie at the heart of the problem.
If the market is sound and prices reasonable, the general public will be able to buy or rent suitable housing on a normal income, the development of housing prices will be stable and there will not be huge long-term swings in the market. This is what is required to solve the problems in the housing market, financial institutions and the overall economy.
From a financial point of view, what could be done to help create a sound housing market?
The first objective is to clarify the fundamental nature that living accommodation and productive land play in real estate, and put primary focus on consumer use, and secondary focus on investment and making money. These priorities must not be changed.
Financial institutions should offer normal loan-to-value ratios and interest rates to people who buy housing to live in or to use for production purposes, but a severely restricted loan-to-value ratio and increased interest rates to investors and wealthy people. If this is not done, it will not be possible to reduce housing speculation and create a sound housing market.
It is obvious that the central bank’s relaxation of control measures will only stimulate speculation. Although it is not certain that the policy will have the intended effect, the message sent will cause a negative impression on the general public: The general impression will be that the government has come under pressure from businesses and other interest groups to support unreasonable housing prices — causing residential justice to remain a distant dream — that the government cannot be trusted and that the general public have been left to fend for themselves.
Business operators and investors are taking advantage of this irresponsible announcement, while regular consumers, who do not understand the situation, are misled to enter the market, thus saving business operators and investors from a difficult situation.
The immoral result is that innocent people are getting hurt. Hopefully, the general public will make careful investigations before taking the leap. House buyers should do their homework and remember that they will be responsible for any potential losses arising from a decision to buy.
The central bank and government authorities should gain a comprehensive understanding of market signals and public opinion to avoid misjudging the situation. Mistaken policy decisions will mislead the distribution of social resources and create public discontent.
The authorities should take this opportunity to carefully assess the impact of the policy and to propose a comprehensive financial reform package to avoid inappropriate pressure from interest groups, and build a sound financial and housing market.
This will be the only way to bring about an economic revival, provide a winning solution for financial institutions, the housing market and the overall economy, and to implement residential justice.
Chang Chin-oh is a professor of land economics at National Chengchi University.
Translated by Perry Svensson
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