Premier Cho Jung-tai (卓榮泰) reiterated last week that the government had not imposed restrictions on housing loans, amid heavy news coverage and online discussion of the issue as the housing market remains hot. Cho said the authorities were concerned about whether banks’ credit risk management was adequate, adding that the Executive Yuan would meet with the central bank to devise a plan to address loan applicants’ concerns without harming first-time buyers.
However, despite the premier’s assurances, the issue has not only raised questions about whether the much discussed loan restrictions are a sign of a potential asset bubble, but it also puts the credibility of regulators — the central bank, the Financial Supervisory Commission (FSC) and the Ministry of Finance — to the test, on the general health of the financial market and the government’s risk control mechanisms.
It all started last month, when the central bank met with 34 local lenders, telling them to propose plans by Friday to cool their real-estate lending or face central bank-imposed measures if persuasion fails. The move underscores just how concerned the central bank is about Taiwan’s high property prices and the risk for banks when their credit portfolios are overconcentrated on real-estate loans.
The central bank later clarified that it was urging lenders to strengthen their self-discipline on real-estate lending and prevent funds from flowing to investors holding nonowner-occupied homes or people who hoard properties. The central bank also said it hopes lenders’ real-estate loans could fall to 35 percent to 36 percent of total loans, after the ratio reached 37.4 percent as of June 30, close to the 37.9 percent record.
The worries are also related to several banks having been on the FSC’s radar as their real-estate lending approaches the regulator’s property loan quota for banks. Under Article 72-2 of the Banking Act (銀行法), loans extended for residential and commercial properties may not exceed 30 percent of the aggregate of a bank’s deposits and financial debentures, or its available funds on hand. The commission’s data showed that as of June 30, local lenders’ property loans reached 26.62 percent of their total deposits and debentures on average, while 13 banks’ ratio had exceeded 27 percent.
Local lenders must improve their high concentration of real-estate loans, as it is crucial for balanced economic development and key to the reasonable allocation of banks’ resources. Moreover, if the central bank decides to further raise its policy rates, or if the asset bubble collapses, people who cannot pay their mortgages would likely dump their properties on the banks, which would result in greater risks for the banking system. After all, there are global precedents of how a slumping property market — such as the asset bubble collapse in Japan during the 1990s, the US subprime mortgage crisis in 2008 and the property debt crisis in China today — could cause financial turmoil and economic slowdown.
The introduction of a government program in August last year that offers preferential loans for first-time home buyers with more flexible conditions and favorable terms played a role in rekindling a hot housing market this year. It led some lenders to hastily increase their property loans in the short term, which not only caused their property lending to move closer to the regulatory ceiling of 30 percent of total loans, but also forced them to set restrictions on people’s mortgage applications, including delaying loan approvals, adjusting mortgage terms and suspending new mortgage operations.
It is correct for the central bank to treat the rising property loans as a “code red,” but as the concerns about loan restrictions affect homebuyers as well as financial and property markets, the financial regulator and monetary policymaker must deal with it cautiously and keep problems from growing severe, without compromising the government’s efforts of achieving housing affordability and availability.
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