Containing Taiwan’s Soaring Residential Property Market

Photo: Matthew Fulco

Monetary controls, tax reform, and affordable housing programs have helped tame speculation and make decent accommodations more accessible. But some say these measures do not go far enough.

The Legislative Yuan this July passed an update to its tax rules regarding residential and commercial real estate. Dubbed the Consolidated Land and Building Tax 2.0, the new rules raise the capital gains tax on property sold within two years of purchase from 35% to 45%, levy the same tax on individuals and businesses that create profit-making companies to buy and sell properties within the same period, and broaden the scope of real estate transactions subject to the new tax rate to include pre-sale homes and certain shareholdings. They also seek to prevent individuals from using the lower of the Land Value Increment Tax and the Income Tax to avoid paying a higher rate.

Two months later, in September, Taiwan’s Central Bank (CBC) introduced credit controls on the property market, prohibiting lenders from granting the grace period normally afforded to buyers of second properties in the island’s six major municipalities. It was the third such action that the bank had taken since December 7 last year (the first two were to limit the loan-to-value ratio for individual buyers seeking to buy a third home to 50%, and 55% for those purchasing a fourth home).

The CBC’s motivation for imposing the new restrictions explicitly was not to make homes more affordable to average Taiwanese, one of the most prominent ongoing domestic economic issues in Taiwan. Rather, it sought to contain a property market overheating from a combination of record low interest rates, rampant speculation, and spiking demand for housing in the areas surrounding Taiwan’s science and technology parks.

“The three rounds of selective credit controls implemented by the Central Bank in a short period [and the new tax rules] were primarily aimed at combatting groups engaging in investment and speculation and do not have much of an impact on the rigid demand” for property, says Liu Pei-chen, an analyst at the Taiwan Institute of Economic Research (TIER) who specializes in real estate. “The short-term impact will be a reduction in the establishment of corporate legal persons to purchase and hoard property and an increase in the cost of purchasing multiple homes and luxury properties.”

On the other hand, she notes, reforms to the Income Tax Act proposed by the Executive Yuan in March targeted at hoarding practices would be much more effective in terms of making vacant properties available and decreasing home prices. However, she adds, careful consideration is needed on how to prevent landlords from avoiding the extra tax burden by raising the rent on their properties, which could impact Taiwan’s 780,000 renters. 

“Although it hasn’t yet been finalized, the house hoarding tax will be a more important policy change in the medium to long term,” Liu says.

Lee Yung-jaan, an expert on urban and rural planning at the Chung-Hua Institution for Economic Research (CIER), agrees that proper taxation is crucial for improving the health of the housing market. However, there is little political will to reform the housing tax regime in any meaningful way because those wealthy enough to afford multiple properties in Taiwan are an influential group.

Lee notes that the Executive Yuan’s hoarding tax reform plan levies a higher rate only on those who own four or more homes, while the rate for one to three homes would remain the same. “But who do you know that owns three homes in Taiwan? It’s only a tiny percentage of people,” Lee says. “If I have a lot of money and the interest rates are low, why not invest in the new housing market?”

Furthermore, the increased hoarding tax rate is still so low that it would not have much of an impact on those wealthy enough to afford a fourth home. “For those who own more than three houses, the government should collect a heavier tax of perhaps around 40-50%,” says Lee. He adds that this rate should particularly apply to property developers and construction companies. “There is still a need in the market so they will keep building houses.”

Skyrocketing prices

The return of a large amount of capital from China, combined with high construction costs, has led to a doubling in the price of homes in Taiwan over the past 18 years.

The high cost of housing is a perennial issue in Taiwan. Between 2005 and 2014, home prices jumped by around 70% due in part to the repatriation of a significant amount of overseas Taiwanese capital from China. They then leveled off for several years following the government’s implementation of measures to cool the property market.

However, in 2017 prices began to climb again steadily. The main cause was similar to what occurred around a decade earlier – Taiwanese businesses in China impacted by rising labor and land costs, as well as steep tariff hikes and export controls levied against China by the U.S. – began reshoring operations, bringing substantial capital back into Taiwan. Government incentives for these businesses to invest in Taiwan accelerated the process, notes Andy Huang, head of research at real estate consultancy REPro Knight Frank.

In the second quarter of this year, the Ministry of the Interior’s housing price index for all of Taiwan increased by 6.67% year-on-year to 112.42, the largest growth since Q1 2015. At an October luncheon hosted by the European Chamber of Commerce in Taiwan, Jones Lang LaSalle (JLL) Taiwan Managing Director Tony Chao noted that overabundant capital combined with surging construction costs has doubled the cost of buying a home in Taiwan since 2003, with home prices in the city of Taipei tripling during the same period.

In addition, says Huang of Knight Frank, stalled travel and reduced spending caused by the COVID-19 pandemic boosted Taiwan’s already very high savings rate, providing banks with ample liquidity.

Between the beginning of 2020 and September of this year, he says, the level of national savings has grown by NT$4.5 trillion (US$162 billion), compared to growth of around NT$500-800 billion in a normal year. This has resulted in a rise in property transactions and speculative behavior, driving housing prices up even further.

Another issue fueling speculation in the Taiwan real estate market is the rapid increase in pre-sale homes – properties that are put on the market before construction is completed – over the past year or so. Huang says that previously around 100,000 units of new homes were put up for sale each year. But in 2019 that number jumped to over 140,000. According to the Ministry of the Interior, the government last year approved 160,000 new development construction permits, a 10-year high. An October 29 article in the Taipei Times reported that presale and new housing projects across Taiwan grew an average of 38% in the third quarter, with the largest growth of 90.6% taking place in Kaohsiung.

And while supply has risen, demand is equally robust. The flurry of investment activity in the Taichung and Tainan science parks over the past two years, brought on by the reshoring phenomenon, has resulted in high demand for housing – both pre-owned and pre-sale – in those locations.

However, Huang notes, the lower down payment often required for pre-sale properties – 10% of the total cost, as opposed to 20% for pre-owned homes – makes them attractive to companies and individuals as a potential investment vehicle. Many thus buy the certificate for pre-sale homes, then sell it off after the value of the property increases.

Huang says that although the Consolidated Land and Building Tax 2.0 does target this kind of behavior, making the pre-sale home market more transparent, it may be difficult to regulate it moving forward because of how entrenched it has become. He points to the example of Hsinchu, the home of Taiwan’s oldest science park. “The industrial base in Hsinchu is very good, but the amount of land there is extremely limited,” he says. “It’s come to the point where only small developments of around 100-200 units are being built.”

When those properties are sold, Huang says, they are snapped up quickly by development companies and other wealthy investors and sold quickly thereafter at higher prices.

“So the people that want to buy a home to actually live in thus have to rely on connections or wait in line to purchase one of these units,” he says. “Right now, there is a lot of capital in Hsinchu and the salary level for employees in the science park is very high, and their willingness to invest in property is also very high. In this unique environment, controlling [this speculative] behavior and trend is quite difficult.”

Housing justice

With property prices unlikely to come down anytime soon, the government has looked at other ways to ensure that Taiwan’s residents – particularly young working professionals, disadvantaged groups, and low-income families – have access to decent affordable housing.

When President Tsai Ing-wen took office in 2016, one of her administration’s policy goals was to increase the stock of low-cost, high-quality public housing through what it termed “housing justice.” That year, the Executive Yuan promulgated a plan to make available 200,000 social housing units between 2017 and 2024.

The Executive Yuan’s housing justice plan is carried out in part by Taiwan’s local governments, which – with central government assistance – acquire land and form implementation teams to carry out social housing projects. The central government also provides local governments with low-interest, long-term loans to finance such projects.

The Taipei City government has used the Executive Yuan’s framework to launch its own equitable housing program, which it calls Housing Justice 2.0. Launched in 2019, the scheme aims to fulfill three main objectives. The first is to offer affordable public accommodations through social housing, rental subsidies, and the use of private resources to promote subletting and leasing management.

Secondly, it seeks to reform the tax system through amendments to the city’s House Tax Act, passed on June 1 this year, which raise the hoarding tax on non-owner-occupied properties to 3.6%, the upper limit authorized by the central government. It also shortens the applicable period of the preferential tax rate for builders who hold residential houses for sale from three years to one year.

Lastly, the program intends to ensure a robust, transparent housing market while ensuring transaction security through the independent review of property sale contracts.

According to Chang Ming-shen, chief secretary of Taipei’s Department of Urban Development, the target number for affordable public housing under the Housing Justice 2.0 program is 50,000 units. So far, he says, the figure has reached around 44,700, which includes over 22,000 rent-subsidized and privately subleased apartments and nearly 20,000 new social housing units. In addition, around 4,500 units of existing public housing are available, including national public housing for rent, affordable housing, housing for the elderly, and interim housing.

Social housing is only for rent, not purchase. It therefore only partially resolves the issue of high housing prices without tackling the root causes of the problem, says Lee of CIER. Nevertheless, he still supports the proliferation of such accommodations, especially in Taiwan’s more highly populated municipalities.

Those qualified to apply for social housing have the choice of living in either renovated or newly constructed buildings. In Taipei, citizens who are 20 years of age or older are eligible if their household registration is in a different location in Taiwan and their household income is lower than the average of 40% of households in the city. The quality of construction and amenities is generally higher than for other buildings in the surrounding area, and some of the construction now utilizes a green design.

While rent for these units should be low enough for those with less financial means to afford them, the Minglun Social Housing Community, the first of the social housing projects completed during Taipei Mayor Ko Wen-je’s tenure, received some negative feedback for what were perceived as inordinately high rental rates. According to a December 2020 report in the Chinese-language United Daily News, rent for a three-bedroom apartment in the new complex is NT$40,500 (US$1,455) per month, compared with the NT$15,600 monthly rent for another project in Linkou.

Responding to the criticism, Chang of the Taipei Department of Urban Development notes that those approved to live in social housing apartments enjoy modern and fully equipped living quarters, 24-hour security, diverse social services and benefits, and convenient access to transportation. “For a normal apartment of the same caliber in Taipei, the rent would be two or three times as high,” he says.

“Social housing is transforming housing culture,” Chang says. “Even if many cannot afford the high home prices in Taipei City, the government can still provide a good environment for renting and change the quality of residential property.”