Low interest rates contribute to rising house prices and the central bank should take steps to reverse their negative effect on wealth distribution, central bank Deputy Governor Chen Nan-kuang (陳南光) said in an article in the January edition of Taiwan Banker magazine, challenging the central bank’s longstanding stance that low interest rates should not be blamed for rising house prices.
While he agreed that interest rates, income, tax, demographics and inflation expectations all have a bearing on house prices, data at home and abroad show low interest rates do contribute to rising house prices, Chen said.
The link between low interest rates and rising house prices holds true in emerging and advanced economies, regardless of the calculation method, he said.
Photo: screen grab from the Web site of National Taiwan University’s Department of Economics
Loose monetary policy helps bolster house prices by spurring demand, reducing purchase costs, fueling expectations of price increases and encouraging risk-taking, he added.
If the central bank’s low interest rate policy has played a part in fostering demand for property and price increases, it should take action to reverse the negative effect of house price increases on wealth distribution, rather than staying on the sidelines and limiting itself to maintaining the stability of the financial system, Chen said.
Central bank Governor Yang Chin-long (楊金龍) has said fiscal measures are more effective tools in curbing housing price increases and central bank interventions aim to prevent funds flowing to the property market for the sake of financial stability.
Yang has said houses price increases and inflation are “moderate,” but Chen pointed out that house prices surged 262 percent between 2000 and last year, with the real increase exceeding 160 percent after factoring in inflation.
That pace is behind only New Zealand and Sweden, and it surpassed more than 20 other economies, including South Korea, the US, Denmark and Israel, he said, adding that house prices in South Korea and the US increased 45 percent and 64 percent in the past 20 years respectively.
Furthermore, the ratio of house prices to family income confirms deteriorating affordability, he added.
House prices in 2002 averaged 4.5 times household income with the mortgage burden at 24 percent of family income, but spiked at 9.1 times household income in the third quarter of last year, with the mortgage burden at 36 percent, Chen said.
Unaffordable housing has also been top of the public’s grievances list for many years, he said.
It is inappropriate for policymakers to contend that low interest rates have little to do with rising house prices, Chen said, bucking the stance of Yang and his predecessor, former central bank governor Perng Fai-nan (彭淮南).
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