Boom or Bubble? What's Behind Taiwan's Rising Real-Estate Prices

In an online survey of people's 10 biggest grievances, conducted by the Research, Development and Evaluation Commission in late November 2009, "the cost of urban housing" ranked first. Although the government has since taken several steps to "exert downward pressure," the price of housing has in fact only risen higher. Exactly how high are housing costs in Taiwan? And what is pushing real-estate prices to rise?

With Taiwan's real-estate market booming, construction-industry insiders often appear on television, arguing that "compared to Hong Kong and Japan, housing isn't expensive here." Predicting that real-estate prices will continue to rise, they urge consumers to "hurry up and buy." Are housing costs high or not? Opinions vary. Of course, every property is different. It is hard to compare homes that vary in terms of location, age, and quality. And what baseline should be used to judge whether real-estate prices are expensive or cheap? That's also key.

Does real estate only rise?

In considering whether housing is expensive, economists often focus on price-to-income ratios, i.e. the median price of a home divided by median household income.

However, just looking at price-to-income ratios doesn't necessarily paint an accurate picture; one must also consider interest rates and the amount of down payment required. To stimulate economic recovery, nations aim to keep interest rates low. If they simultaneously want to rein in rising real-estate prices, they typically adopt another measure: they lower the percentage of a home's value that a buyer is allowed to mortgage. For instance, Hong Kong raised the down-payment percentage required for buying homes priced at HK$20 million or more to 40%, and the Korean government lowered the maximum loan-to-value ratio on mortgages in the Seoul area to 50%. Here in Taiwan, the Central Bank on June 24 without warning raised interest rates across the board by 0.125 percentage points and slapped controls on lending to parties buying property for investment purposes. The move was clearly intended as a warning to the market.

The price-to-income ratio may not always predict the rise or fall of home prices, but it is a good measure of affordability for an average household. Consequently, it is sometimes described as the "home buyers' hardship index." Internationally, a general rule of thumb is that a reasonable price-to-income ratio should not exceed 5.1. That is to say that if a family didn't eat or drink or spend money on anything but their home, it would take no more than 5.1 years of their income to pay for it.

According to a survey of residential housing demand trends published by the Ministry of the Interior's Construction and Planning Agency, the price-to-income ratio in Taiwan's five largest metropolitan areas over the past few years has typically ranged from 6.0 to 7.0. For the last half of 2009 the figure stood at 7.08. But in Taipei City and County the ratio rose substantially-to 9.06 in the last half of 2009. It is estimated that residents of the silk-stocking Da'an District would have to put up 14.6 years of income to buy a home there.

The following graph clearly shows that the price-to-income ratio in Taipei City began to rise rapidly in 2006-2007, and it now stands as high as it has since the housing bubble that peaked in 1990.

As everyone knows, household expendable income has shown sluggish growth in recent years and even declined 1.1% in 2008. In comparison, the average advance sale price for a home being built in Taipei City has risen 50% over the last three years, so that real-estate prices seem increasingly decoupled from basic economic realities. Apart from being put off by the high price of housing, the public also feels ill at ease when looking at the real-estate market, wondering: "When is the bubble going to burst?"

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