The central bank kept its policy rates unchanged at its quarterly board meeting on Thursday — with the discount rate, the rate on refinancing of secured loans and the rate on temporary accommodations held at 2 percent, 2.375 percent and 4.25 percent respectively. That aligns with market expectations, despite the US Federal Reserve’s 50 basis-point rate cut, while several other central banks have been pursuing monetary easing.
However, the bank raised the reserve requirement ratio (RRR) by 25 basis points, effective on Tuesday next week, and further adjusted selective credit control measures, which took effect on Friday, as it aims to contain housing market speculation and property hoarding, while preventing the excessive flow of bank credit into the real-estate market.
The RRR hike follows a similar action in June and is expected to reduce liquidity in the banking sector by NT$125 billion (US$3.9 billion), while further tightening selective credit control measures — including applying more stringent loan-to-value (LTV) ratios on different types of housing loans and expanding restrictions nationwide. Market watchers view the moves as the most severe ever, signaling the central bank’s grave concerns over the real-estate market as housing transactions continue to climb and property prices have risen to the highest level since the second half of last year.
There is no question that the central bank is stepping up efforts to cool the real-estate market after the ratio of mortgages to banks’ total loans — a measure of the concentration of real-estate loans in the banking sector — rose to 37.5 percent at the end of last month. That is near its peak of 37.9 percent in October 2009 and higher than the central bank’s target of 35 to 36 percent.
Together with moral suasion, LTV ratio adjustments and a sequential RRR hike, the central bank has adopted a comprehensive strategy to slow the growth of real-estate loans and prevent an asset bubble burst — such as what happened in Japan in the 1990s or the US subprime mortgage crisis in 2008 and 2009 — which could lead to financial turmoil and an economic slowdown. In the Japanese and US cases, some people generally believed that the market was efficient and would automatically adjust itself after reaching a certain point, but it did not and the markets eventually collapsed.
An important message from the central bank is that despite homebuyers’ complaints about loan restrictions, it has to take serious measures to pre-empt any threat to the nation’s financial and economic health. More importantly, the central bank does not want lenders and investors to assume that a real-estate boom is sustainable, as the market could collapse suddenly if reckless lending and irrational investing prevail.
Another message from the central bank’s latest policy decisions is that it would decouple from the Fed going forward, as Taiwan’s monetary policymaker is determined to cool down the domestic real-estate market, while its US counterpart is starting a rate-cut cycle in hopes of a soft landing for its economy. While the central bank expects inflation to fall below its 2 percent alert level next year, it would cut interest rates only if inflation drops below 1.5 percent, it said.
Against this backdrop, local lenders must either cut back on their real-estate lending or expand their non-real-estate portfolios to avoid raising eyebrows at the central bank. People could expect the property market to undergo transaction and price corrections in the near term without worries of a hard landing.
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