Improved diplomatic relations between China and Taiwan have helped to boost Taiwan’s housing market, as investors speculate on increased real estate investment from mainland Chinese buyers. With interest rates low and Taiwan and China expected to sign an additional financial cooperation agreement later in 2010, some experts believe that housing prices could grow significantly in 2010 and 2011. For more on this, see the following article from Global Property Guide.
Closer economic ties with mainland China are expected to further boost Taiwan’s housing market in 2010.
In Q3 2009, Taiwan’s house price index was up by 9.4% (10.3% in real terms) from a year earlier due to low interest rates, surging stock market, lower taxes and improvements in cross-Taiwan relations.. This was in sharp contrast to the 11% y-o-y price fall (-12.8% in real terms) to Q1 2009, according to the Sinyi Realty Inc., Taiwan’s biggest real estate brokerage.
The recovery was visible in main urban areas with house prices rising by 9% (10% in real terms) in Taipei City (the capital) and 10.9% (11.8%) in Taichung (the third largest city) in Q3 2009 from a year earlier. In Kaohsiung, the second largest city, house prices rose by a mere 0.7% (1.6% in real terms), over the same period.
A stronger housing boom is expected when the property market is opened to Chinese buyers. Right now, foreigners can only buy in Taiwan by reciprocity principles.
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. An Economic Cooperation Framework Agreement (ECFA) between Taiwan and China is expected to be signed this year.
With improved consumer and business sentiments and hopes of economic recovery, house prices are expected to rise by 15% next year, according to Tayher Lim of CLSA Asia – Pacific Markets, an international investment group.
Chao Teng-hsiung of the Farglory Group, a leading property developer, speculated that house prices can rise by 5% to 10% within 3 – 5 years of the ECFA signing. In Taipei, Chao said, prices could surge by up to 50% within the same period.
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Taiwan’s economy is expected to rebound in 2010 with a 4.4% GDP growth. This is in sharp contrast to an estimated 4% contraction in 2009 and an anemic 0.1% increase in 2008.
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, Professor Chang Chin-oh of the National Chengchi University (NCCU) Chang contended 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 claimed 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. Su said that “The boom in the housing market is fueled by low interest rates, which give business conglomerates and speculators leverage to play the market.”
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 meter (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 has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.