Government measures to cool the residential property market have been successful, but prices remain high in the most desirable markets, putting homeownership out of reach for many Taiwanese.

The Taiwan government has spent years trying to cool a red-hot residential property market. Measured in terms of controlling price growth, the policies have borne fruit. The problem is that the measures to tame speculation came late, after about a decade of surging prices.

Between 2005 and the end of Taiwan’s residential property bull market in 2014, average housing prices rose 70%, according to a 2015 Brookings Institution report. Outpacing the national average, prices doubled in Taipei.

The typical Taipei apartment costs 14.5 times the median annual household income, according to Ministry of the Interior data. The mortgage burden in the nation’s capital is a whopping 59% of household income, whereas property analysts recommend that a mortgage burden not be higher than 30%.

In terms of the price-to-income ratio, housing in Taipei is costlier than in London, New York, Tokyo, and Singapore. In Asia, only Hong Kong, where a home costs the equivalent of 21 years of annual income, according to investment bank UBS, is more unaffordable than Taipei.

Unlike those other cities, Taipei is not a hub for global capital, nor is it a favorite playground of the global super rich. Remarkably, domestic demand is entirely responsible for Taipei’s sky-high housing prices, driven by a confluence of factors unique to the city. That makes addressing the problem challenging for policymakers. Curbing sales to foreign buyers – a standard tactic for cooling overheated property markets around the world – will do no good.

The fundamental problem is one of supply and demand. As Taiwan’s capital, Taipei attracts people from throughout the country, yet housing supply is tight. The slow pace of urban renewal cannot meet demand, and there is little public housing. Because of Taiwan’s susceptibility to earthquakes, buildings above 50 meters must meet rigorous safety standards, making residential skyscrapers a rarity.

Finally, Taipei itself is relatively small at 270 square kilometers – 114 of which belong to Yangmingshan National Park. By comparison, the area of Singapore is 722 square kilometers, Hong Kong Island is 1,106, and Tokyo 2,188.

At the same time, Taiwanese have a deep-seated cultural preference for homeownership. The homeownership rate of 85% is among the highest in developed countries.

“Renting isn’t viewed favorably in our culture,” says Ping Lee, head of research for property consultancy CBRE in Taiwan. “Taiwanese believe owning a home is essential for stability and building wealth. If you want to get married, you need to have a house.”

For those with money to invest, residential real estate has long been a preferred option in Taiwan, particularly in Taipei’s central business district. That’s not for lack of other investment options, as Taiwan has highly developed capital markets. However, “Taiwanese would prefer to put their money in property rather than the bank or the stock market, or anything else,” Lee says.

For many years, low interest rates, coupled with the promise of quick appreciation, lured speculators to the housing market. Further, the central government relied on the property market to help boost the economy during the past two downturns, the first following the bursting of the dot-com bubble in 2001 and the second during the 2008-2009 global financial crisis.

“Taiwan’s government successively introduced measures to revitalize the real estate market,” says Liu Pei-chen, a research fellow and real estate expert at the Taiwan Institute of Economic Research (TIER). The policies went well beyond lowering the interest rate for mortgages. In the early 2000s, the government halved the land value-added tax, introduced real estate securitization, and extended the period of validity for construction licenses.

In 2009, the Ma Ying-jeou administration slashed the gift and estate taxes from 50% to 10% in a bid to encourage the repatriation of overseas capital. In practice, Taiwanese businesspeople brought the money home and parked it in the housing market. Meanwhile, average housing prices in Taiwan climbed 34% between 2008 and 2012, according to data compiled by property developer Cathay Real Estate. In Taipei, they rose 50%. 

Many countries implemented loose monetary policy alongside low interest rates after the global financial crisis, prompting speculative investment in real estate. “In Taiwan the incentive to invest has been even stronger due to the sudden drop in estate and gift taxes after amendments to the relevant laws in 2009,” the Chinese-language Economic Daily News noted in a 2013 commentary. 

Between a rock and a hard place

Eventually, the Taiwanese government moved to cool the red-hot property market. To curb speculative investment, in 2014 it introduced a hoarding tax on owners of more than one house. The tax rates for non-owner-occupied residential properties range from 1.5% to 3.6%. But observers note that local government authorities usually levy the minimum 1.5% so as not to irk constituents.

Amendments to the Income Tax Act that took effect in January 2016 impose a capital gains tax of up to 45% on profits from property sales. The maximum 45% levy is imposed on individual owners residing in Taiwan who sell their property within one year of purchase. If a property is sold between two and 10 years after its purchase, the tax falls to 20%. For properties sold after more than 10 years, the tax is 15%.

The new taxes have been effective, as Taiwan’s property market has cooled considerably since 2014. In 2016, transactions fell to 182,287 units, the lowest since record-keeping began in 1991. Price growth is relatively flat at 1-2% annually.

Demand has gradually rebounded, likely reaching 300,000 transactions in 2019. This time, though, speculators are scant, analysts say. According to property broker Sinyi Realty, property deals across Taiwan rose about 10% year-on-year in December on the back of brisk demand for apartments priced between NT$7 million and NT$20 million (about US$232,000-$664,000). In Taipei, those units are popular with first-time buyers and are considered relatively affordable, although they tend to be small.

“The market has settled down,” says Tsing Ching-te, research manager at Sinyi in Taipei. “It’s easier for sales to close now that buyers aren’t asking for big discounts anymore.” Previously, buyers held out for better deals in expectation that prices would keep falling, he adds.

For people working in Taipei who want more space for their money, New Taipei City is an option. Unfortunately, the most desirable districts of New Taipei, such as the parts of Banqiao and Xindian closest to Taipei, are not much cheaper than the city itself. Overall, the mortgage burden for New Taipei City is about 48%, according to government data – lower than Taipei City’s 59%, but still high.

Housing is more affordable in Taoyuan, about an hour from Taipei by car, where the mortgage burden is just 30%.

Some scholars are urging the government to encourage renting over homeownership. They point to wealthy, advanced countries where the homeownership rate is low as proof that the idea is feasible. In Switzerland, the rate is just 42%, and in Germany 52%.

Sources interviewed by Taiwan Business TOPICS expressed skepticism about promoting rental housing in Taiwan. “Homeownership demand in Taiwan will stay strong until the end of time,” says Jamie Chang, assistant manager at Jones Lang Lasalle Taiwan, a property consultancy. He notes that about 87% of Taiwanese today say they want to be homeowners, despite the meteoric rise in prices since the mid-2000s.

For their part, landlords hesitate to rent homes to older people. They worry that if a tenant dies in an apartment they own, they won’t be able to rent it out to someone else. Many Taiwanese would hesitate to live in such a property, says Sinyi’s Tseng.

Meanwhile, analysts note that taxes alone will not solve the housing problem, since levies can arrest the surge in housing prices, but cannot bring them down sharply. 

Even if the government could drastically reduce housing prices, it would hesitate to take that step, CBRE’s Lee says. “The wealth of almost all Taiwanese families is tied up in real estate, not just the rich,” she observes.

Instead, the government plans to build more public housing to provide affordable housing at fixed prices for those who meet eligibility criteria. TIER’s Liu notes that the aim is to increase the proportion of public housing from the current 0.08% of total housing units to 2.34% by 2024.

“0.08% is a relatively low level internationally, far lower than neighboring Hong Kong, South Korea, Japan, and Singapore,” she says. Nearly 29% of Hong Kong’s housing stock is public. In South Korea, Japan, and Singapore, the proportion is 6.5%, 6.1%, and 3% respectively, she adds.

If the government reaches its target, Taiwan will have about 85,000 public housing units by 2024, mostly in the northern part of the country. Elsewhere in Taiwan, housing is generally more affordable – though the mortgage burden in Taichung is approaching 40%.

At a September press conference, Taipei mayor Ko Wen-je announced that the city intends to build 50,000 public housing units. He said that the construction process would take up to seven years, longer than originally planned. Currently 9,000 units are under construction.

In his remarks, Ko emphasized the need to resolve Taiwan’s affordable housing crisis before it foments social strife. He drew a comparison between Taiwan and Hong Kong. In the former British colony, “high rent and housing prices are causing class struggle, a widening wealth disparity and accumulating resentment among young people,” Ko said. Unless the problem is solved, “Hong Kong’s problem today could become Taiwan’s tomorrow.”