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Sinyi Real Estate Planning and Research reports that Taiwanese residential real estate activity is slowing after three years of steady growth when adjusted for inflation. Although house prices dropped in June 2012 in the capital city of Taipei, Taiwan Realty Company reported that the national price index increased 4.39% for the year ending in the same month. Experts believe this was due to investment speculation driven by improved relations between Taiwan and China, but now demand is dropping and rental yields are much lower than expected. For more on this continue reading the following article from Global Property Guide.

After three years of unbroken house price rises, Taiwan’s housing market is now slowing sharply, as economic conditions deteriorate.

In Greater Taipei, the Lutheran home price index posted a meager growth of 0.96% during the year ending in June 2012, according to Sinyi Real Estate Planning and Research. However, when adjusted for inflation, the index actually dropped 0.84% over the same period. Over the latest quarter, house prices in Greater Taipei dropped 1.1% (-3.12% inflation-adjusted) in June 2012.

Nationally, the housing price index rose by 4.39% (2.57% inflation-adjusted) y-o-y in June 2012, according to Taiwan Realty Co. House prices in the country increased by 1.71% during the latest quarter.

Taipei, Taiwan’s capital, has the most expensive housing in the country, with an average price of TW$518,600 (US$17,611) per ping (a customary and traditional unit of measurement in Taiwan which is equivalent to 3.306 square meters).

Demand waning.  In the first half of 2012, property transactions in Taiwan fell 20.88% from a year earlier to 158,673 units, according to the Ministry of the Interior, mainly due to the luxury tax introduced in June 2011 to curb speculation.

The number of unoccupied houses is rising. In the first half of 2012, the total value of new houses launched in Northern Taiwan was TWD432.1 billion (US$14.7 billion), of which only about 40% were sold, while the remaining 60% (equivalent to about 12,822 units) remain unsold, and available in the market.

In 2011, the total number of unoccupied houses reached about 1.56 million units, according to Alpha Cho, a land valuation expert.

Residential property sales are projected to fall by another 10% to15% in the second half of the year, according to local real estate market experts.

Taiwan’s 2012 economic growth projected was cut eight times to 1.66%, amid deteriorating global economic prospects. In the second quarter of 2012, the economy contracted by 0.2% from a year earlier, according to the Directorate General of Budget, Accounting and Statistics (DGBAS).

Taiwan and China

Relations between mainland China and Taiwan began to thaw after President Ma Ying-Jeou of the Kuomintang Party assumed office in May 2008. He vowed greater cooperation with mainland China and denounced independence for Taiwan, a sharp contrast to his predecessor, Chen Shui-bian.

In his inaugural address, Ma promised “no independence, no reunification and no war” during his presidency. In November 2009, several memorandums of agreement between Taiwan and China on financial cooperation were signed. These symbolic gestures reassured investors and home buyers alike.

In June 2010, an Economic Cooperation Framework Agreement (ECFA) was signed by Taiwan and China.

Chao Teng-hsiung of the Farglory Group, a leading property developer, speculated that house prices can rise by 5% to 10% within the 3 – 5 years of the ECFA signing. In Taipei, Chao said, prices can surge by up to 50% within the same period.

Speculation worries

The strong rise of house prices even before the economy recovery has led to fears that speculators are driving the market.

In a study published in early 2009, Professor Chang Chin-oh of the National Chengchi University (NCCU), noted that residential property prices in Taipei City surged by 50% over the past three years while average household incomes have grown by only 2% over the same period.

In a November 2009 interview with Central News Agency, Chang contends that the situation is not sustainable and that the main driver of house price growth is speculation driven by expectations of future investment by mainland Chinese.

Chang further presumes that speculators account for at least 50% of residential real estate transactions over the past three years.

The observation was supported by Stanley Su, a senior researcher at Sinyi Realty. In the same article by CNA, Su said that “The boom in the housing market is fuelled by low interest rates, which give business conglomerates and speculators leverage to play the market.”

Anti-speculative worries were similarly raised in early 2008 when residential property prices rose by more than 10% y-o-y during the first quarter. In April 2008, Ma announced that he would take measures to curb speculative Chinese capital from disrupting the local real estate market. He suggested the new administration might forbid Chinese investors from reselling local property for five years after purchase.

It is yet to be seen what the government will do to address property speculators.

Low interest rates

Taiwan’s Central Bank has kept its benchmark interest rate at a historic low of 1.25% since February 2009. The move was made to buoy the economy amidst the global economic downturn.

The gradual ascent of key interest rates was halted in 2008 as the effects of the global financial meltdown and economic slowdown reach Taiwan. Heavily dependent on exports, Taiwan was seriously affected by the US economic recession. The key interest rate was reduced from a five-year peak of 3.625% in August 2008 to 1.25% in February 2009.

Low interest rates boosted the mortgage market. Loans for house purchase rose by 4.7% from NT$ 4.66 trillion (US$ 146 billion) to NT$4.88 trillion (US$152 billion) over the year to November 2009. Taiwan’s mortgage market is estimated to be around 41% of GDP by the end of 2009, up from 29% of GDP in 2003.

Most residential mortgages in Taiwan are variable rate mortgages with an average maturity of 25 years.

With the signing of the MOU in November 2009. With this, Chinese banks based in Taiwan can now offer mortgages in the country.

Memories of past housing bubbles

Market analysts tend to be nervous of any sign of a housing bubble because they feel they have seen this before. An extraordinary residential property boom took place from 1986 to 1991, associated with the stock market bubble.

There followed a bust from 1991 to 2002. By the end of 2002 property prices in Taipei City had dropped by around 20%, in Taipei County by 30%, in Taichung area by 40%, and in Kaohsiung area by 50%.

To revive the housing market, in October 2001 a law allowing foreigners to buy property was panned. Other measures included:

  • Low-interest mortgage loans;
  • Allowing enterprises with capital from mainland China to invest in Taiwan´s real estate market;
  • Slashing the land value incremental tax rate
  • Helping organize private asset management corporations; and
  • Expanding the supply of new housing units for people with lower incomes, workers, government employees, and families of servicemen.

The base lending rate was lowered from 7.1% in 2002, to an average of 3.7% in 2003.

The remedy worked. Taiwan’s GDP rose by 6.1% in 2004, by 4.0% in 2005, 4.6% in 2006 and 4.2% in 2007.

With the recent economic contraction, unemployment rose to more than 6% in Q3 2009. It is expected to fall slightly go down to around 5.8% by the end of 2010.

Low yields in Taiwan

Gross rental yields in Taiwan are unusually low, at an average of 2.84%, often a sign of an overvalued market. In April 2009, the highest yielding apartment size was a 75 square metre (sq. m.) apartment, which yielded 3.56%, according to the Global Property Guide.

Taiwan has one of the highest home ownership rates in the world at 87%, while social housing accounts for about 5% of households. And the trend towards home ownership is increasing. Because of this, Taiwan’s rental market is quite small, around 8% of around seven million households.

This article was republished with permission from Global Property Guide.