Fri, Jul 09, 2021 page8

• Housing insanity needs attention

  • By James Lee 李牮斯
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  “Insanity is doing the same thing over and over again and expecting different results.”

  This popular quote is often attributed to Albert Einstein. The fact that he never said it does not detract from its meaning.

  The Taipei Times article “Red-hot housing defies China, virus” (July 5, page 16) correctly pointed out that property prices in Taiwan have over the years continued to defy increasingly draconian policies.

  Natural market forces such as affordability, as measured by the rent-to-own ratio or income multiples in which Taiwan ranked as one of the worst globally, also seem to have a hard time putting a leash on runaway prices.

  When the basic human need of putting a roof over one’s family is becoming increasingly out of reach for ordinary households in Taiwan, one must question if the government has been prescribing the right medicine for this socially destabilizing symptom, or if the nation’s elected officials are simply doing the same thing over and over again and expecting different results.

  To get to the root of the problem, we must ask what drives the insatiable demand for properties.

  The English translation of the Chinese phrase “owning property is owning wealth,” as highlighted in the article, misses the nuance of what motivates people to buy properties in Taiwan. “Owning property is saving wealth” would be a more accurate translation for most Taiwanese house seekers.

  In academic terms, it means to save one’s hard work into a “store of value” (SoV) asset that can be passed down through generations.

  As opposed to repeating the same policies with few results, perhaps the real insanity is the lack of response by policymakers to address the basic need for a good SoV that can withstand the test of time and inflation.

  Despite being one of three core functions of a currency, SoV has largely existed only in economics textbooks, but omitted in policy frameworks in real life. This is the reason for the dire demand for SoVs in places where governments have lagged in crafting appropriate policies to meet the natural demand.

  Statistics show that fiat currencies issued by governments fail miserably in providing the core SoV function of a currency taught in elementary economics classes.

  Take the New Taiwan Dollar as an example. Since 1971, when the modern global monetary framework was created via the “Nixon shock,” the NT dollar has lost 76.9 percent of its purchasing power, according to the official GDP deflator published by the Executive Yuan.

  Older Taiwanese would likely note that the actual cost of living has risen far more than the suggested statistical number over this period.

  This problem is not unique to Taiwan, as no fiat currency issued by any government has ever maintained purchasing power over a normal person’s lifespan, which would otherwise qualify it as a good SoV. In fact, the purchasing power of all fiat currencies collapses toward zero in the long run, if history is any guide.

  That leaves a huge dilemma for Taiwanese to deal with. After a lifetime of hard work and disciplined saving, how do they store that wealth to better the lives of the next generation, or even for their own use at an old age?

  Stock markets are at 129-year high valuations globally, fixed-income bonds in which Taiwanese have great affinity are facing zero-bound interest rates, and no currency kept in banks can maintain its value given the race by global central banks to print more.

  In the US dollar’s case, it is a 76.3 percent dilution of the monetary base since the beginning of last year, which could be reflected in rising costs over time.

  That leaves real estate, especially land, as the most accessible and familiar SoV option. When people purchase properties to save wealth (not to speculate), they typically do not intend to sell in the foreseeable future.

  In a situation where cash is needed for daily consumption, properties can always be collateralized to take out tax-free loans when the value goes up over time with inflation. This renders any profit tax measures in the existing policy toolbox ineffective to curb the price, which is evident after rounds of failed policy attempts.

  However, using a property as an SoV creates social problems, because a house is a home to families. When the use of a home is mixed with other financial considerations, the price of a roof is driven beyond what the natural demand for shelter can sustain.

  For young house owners, this usually equates to the “mortgage slave” status that erodes standards of living and constrains social mobility. For those who cannot afford to purchase a decent home, it magnifies the sense of inequality that often manifests into destabilizing political populism.

  Deteriorating housing affordability is a common challenge faced by many other countries, and the administration of President Tsai Ing-wen has tried solving the problem using a matrix of policies in the conventional toolbox.

  The real solution might be one the government has not tackled head-on: the demand pressure for SoV. Ordinary Taiwanese need policy guidance to channel their life savings into existing pure-use SoVs that have few real-world applications, such as gold and bitcoin.

  The government should diversify the policy consultation process away from the existing political machine dominated by the central bank, considering that its monetary policy is one culprit of the housing problem.

  Once a comprehensive SoV policy is communicated with the public, a win-win balance can be reached, in which savers have access to an SoV that is superior to properties, and those who have the basic human desire to raise families can become homeowners.

  James Lee is a consultant at Mimesis Capital in Taipei.
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