According to the first part of this article, Taiwan has one of the highest housing prices in the world, and one of the lowest wages among advanced countries, leading to one of the most unaffordable housing among advanced countries.
In this part of the article, I analyze the long-term trends of Taiwan’s housing prices and wages, and compare them with other indicators to understand how fast Taiwan’s housing prices have grown and how it threatens to destabilize the economy.
For Taiwan, I use two housing price indexes: the Sinyi housing price index, which covers mainly sales of existing dwellings, and the Cathay housing price index, which covers new and pre-sale dwellings, and which the interior ministry uses. Comparing these two indexes gives a general sense of Taiwan’s housing prices. For the other countries, I use the index compiled by the Organization for Economic Co-operation and Development (OECD), which “covers the prices for the sale of newly-built and existing dwellings.”
Housing prices started climbing in the early 2000s after the government dramatically reduced interest rates and enacted a law for real estate securitization in 2003. At the same time, the government also implemented a series of measures of financial liberation. A massive influx of both domestic and foreign capital spurred the latest round of housing speculation and its effects have lasted for the past 20 years.
According to the Sinyi housing price index, Taiwan’s housing prices have been growing at one of the fastest rates since 2005 among advanced countries (see red line in the chart below). This holds true according to the Cathay housing price index (maroon line).
Many apartments are left vacant by speculators. The vacancy rate increased from 13.3% in 1990 to 17.6% in 2000 and then to 19.3% by 2010.
The housing prices again escalated after the 2008 economic crisis, when Ma Ying-jeou’s administration cut gift and estate taxes from 50% to 10% in 2009, and lowered the corporate income tax from 25% to 17%, which resulted in Taiwanese business people bringing their money back and investing in housing.
Since then, Taiwan’s housing prices have been growing one of the fastest among advanced countries – note the sharp upward turn in recent years, according to the Cathay housing price index (maroon line).
From 2017, the housing prices saw yet another bout of dramatic escalation, as Taiwanese business people returning to Taiwan pushed up housing prices. In 2019, the government launched a three-year program providing loans to Taiwanese manufacturers to return, which pushed up prices again.
Based on a comparison using the Cathay housing price index, Taiwan’s housing prices grew the second fastest among advanced countries, if not the fastest (maroon line), especially in the last two years.
Since 2021, Taiwan’s housing prices have skyrocketed. According to both indexes, the prices have grown the fastest in the last two years, as can be seen in the chart below.
Real estate speculation has been a major driver of housing prices. In 2017, when Zongtai Real Estate Development launched a development project, it said 91% of the units were bought for the buyers’ own use. But in 2021, the number fell to below 80% in another project.
To find out a long term trend, I compare Taipei, where data is available, with other capitals and major cities in other advanced countries. Taipei’s housing prices have grown the fastest since 1985.
Taiwan’s housing prices started escalating at that time following the rapid liberalization and deregulation of the economy. As domestic and foreign capital flooded the housing market, housing prices tripled between 1986 and 1992.
Over the past almost two decades, starting from 2004, Taipei’s housing prices have also grown one of the fastest. As a result, the city now has one of the highest housing prices in the world, as shown in the previous part of the article.
Taiwan’s housing prices have become one of the highest in the world today, because they have been increasing much more rapidly than other advanced countries in the last 40 years. The government is to blame for not enacting stronger policies to control housing prices.
Now Taiwan’s housing has become one of the most unaffordable among advanced countries.
As highlighted in the previous part of this article, Taiwan’s housing price-to-income ratio has become one of the highest among advanced countries. The ratio is a measurement of housing affordability. The higher it is, the more unaffordable housing is. Housing is considered affordable when the ratio is 3.0 or less is considered affordable and severely unaffordable if the ratio is above 5.0.
From 2002 to 2022, Taiwan’s housing price-to-income ratio rose from 4.5 to 9.6 (see green line in chart), while in Taipei, it soared from 6.1 to 16.2 (brown line), meaning housing in the capital is severely unaffordable.
Another measure of affordability is mortgage burden, or the share of housing mortgage as part of household disposable income. From 2002 to 2022, Taiwan’s mortgage burden has risen from 23.9% to 38.4%, while in Taipei, it rose by an even more dramatic 32.5% to 64.9%.
Generally, housing is deemed unaffordable when mortgage burden is above 30% and is severely unaffordable when it’s above 50%.
As housing became unaffordable, household debt also escalated. Since 2000, Taiwan’s household debt has more than doubled.
The ratio of household debt to disposable income has risen to record levels by 2020.
However, while housing prices have become one of the highest in the world, Taiwan’s income has not been growing at a similar rate to catch up.
From 2005 after the current bout of housing price escalation began, Taiwan’s housing prices have been growing at one of the fastest rates among advanced countries, but the median household disposable income has been growing at one of the slowest rates (red line in the chart below).
Since the turn of the century, Taiwan’s minimum wage has also been growing at one of the slowest rates among advanced countries.
As a result of slow growth in wages and fast growth in housing prices, Taiwan’s housing has become one of the most unaffordable, if not the most unaffordable, among advanced countries, as shown in the previous part of this article, with the high housing price-to-income ratio and mortgage burden.
There doesn’t seem to be a reasonable explanation for why Taiwan’s housing is so expensive.
In the chart below, Taiwan’s housing prices have been growing much faster than construction costs.
But in the European Union, the growth of housing prices has generally been following that of construction costs.
It is not like Taiwan’s construction costs are growing faster than Europe. In fact, construction costs in both places have been growing at a similar rate.
But housing prices have been growing almost twice as rapidly in Taiwan as in Europe.
Taiwan’s housing prices (green lines in the chart below) should be growing at a slower rate as in Europe (pink line) if they grow on par with the construction costs.
Compared with actual construction costs, Taiwan’s housing prices become even more outrageous.
According to Turner & Townsend, Taipei’s construction costs are the lowest among advanced countries.
Taiwan’s construction costs are 20% to 50% lower than in other advanced countries.
Despite the low construction costs, Taiwan’s housing prices are one of the highest in the world.
Taiwan’s construction costs are 20% to 50% lower than other advanced countries, but the housing is two to four times more expensive. This has allowed real estate companies to profit several times more than those in other advanced countries.
In general, cities with lower construction costs also have lower housing prices.
However, in the chart below, Taipei falls far away from the trendline – Taipei has the lowest construction costs among cities in advanced countries, but the housing prices are instead one of the highest.
On par with its construction costs, Taipei’s housing should be the cheapest, or less than a fifth of its price today. Taipei’s residents are severely overpaying for their apartments.
Given how cheap it is to build apartments in Taiwan, excessive speculation is the only explanation for why housing prices are so high.
Low mortgage interest rates have encouraged housing speculation. Even after the slight growth over the last few months, interest rates in Taiwan remain one of the lowest among advanced countries.
With mortgage interest rates declining over the last two to three decades, people have been taking more home loans.
In the chart below, the expansion of home loans has followed the decline of mortgage interest rates. The faster decline in interest rates in the 2000s resulted in the quick expansion of home loans.
Housing is a major vehicle of speculation in Taiwan. The trends of the Cathay housing price index follow those of the weighted index of the Taiwan stock exchange.
Engaging in housing speculation, Knight Frank found that the super-wealthy in Taiwan owned 5.4 homes in 2017, second only to those in Saudi Arabia.
Last year, 525,925 people were owners of non-owner occupied properties housing which is not the owners’ personal residence.
Among these owners, 103,228, or close to 20% of them, owned two or more of such housing, 36,707 owned three or more, 9,127 people owned five or more, and 1,659 people owned a crazy 10 or more.
In Taiwan, low personal income tax makes it easier for the rich to accumulate wealth.
The chart below shows that mortgage burden tends to be lower in countries with lower personal income tax. Taiwan’s top personal income tax is 40%, lower than many advanced countries, but its mortgage burden is high. This suggests that the relatively low income taxes allow the wealthy population to accumulate more wealth and speculate on housing, and thereby drive up housing prices and mortgage burdens.
In Taiwan, speculation has resulted in one of the highest housing prices in the world. But with construction costs being the lowest among advanced countries, real estate companies are raking it in.
In the chart below, the profits of Taiwan’s real estate companies have grown by a massive 10 times since the early-2000s.
The chart below shows that real estate profits in Taipei have been increasing in tandem with housing prices. Real estate profits have seen dramatic spikes with each wave of housing price increase, especially in the early-2000s, and since the mid-2010s.
The phenomenon suggests that the operating costs for these companies have barely risen, and that most of the housing price increases have actually benefited their bottom line and pockets instead.
In comparison with other advanced countries, Taiwan’s real estate profits have grown one of the fastest since 2002.
Countries like Lithuania, Estonia, and the Czech Republic have also seen a fast increase in real estate profits, but note that they have grown the minimum wage at one of the fastest rates among advanced countries (as seen above); by contrast, Taiwan’s wages have grown one of the slowest. Therefore, in these countries, wages have been growing in tandem with increases in housing prices and real estate profits.
In Taiwan, wages have been stagnating while housing prices escalated.
Taiwan’s real estate companies are highly profitable. They build new housing on low costs and sell it at exorbitant prices.
Since 1985, Taiwan’s real estate profits have grown by nearly 40 times (purple line), but the minimum wage has not even grown by four times (green line). If the minimum wage had grown as quickly as real estate profits, it would have been close to NT$230,000 a month today.
Following the latest bout of housing price increases from 2005, Taiwan’s minimum wage should be around NT$40,000 to NT$45,000 a month.
Similarly, following the fast growth of Taipei’s housing prices since 1985, Taiwan’s minimum wage should be more than NT$80,000 a month today – or how much Taiwan’s minimum wage should be for housing to be considered affordable, as mentioned in the previous part of this article.
Taiwan’s policymakers and central bank have allowed Taiwan’s housing prices to increase uncontrollably, but they have not increased the minimum wage enough for the wages to catch up – the minimum wage did not grow at all for 12 years from the late-1990s to the early-2010s.
But it’s not like Taiwan’s housing investors are benefiting that well from high housing prices. Instead, they have speculated housing prices to the point of hurting themselves.
The chart below shows that housing prices are higher in countries with a higher GDP per capita. As wages grow, household consumption expenditures also grow, and thereby lead to the growth of the economy. Such cyclical growth enables wages, housing prices and the economy to grow in tandem with one another.
Taiwan’s housing prices are one of the highest in the world, but its GDP per capita is still comparatively low among advanced countries. In other words, the economy and wages aren’t growing as fast as housing prices, which indicates that housing is overvalued.
Indeed, Taiwan’s economic growth couldn’t catch up with the growth in housing prices, which have grown by over 3 times since 2001. Over the same period, the economy has only grown by 1.9 times.
Speculators invest in housing for high returns. However, given Taiwan’s low economic growth, that’s not going to be sensible in the long run.
For one, I have explained in previous articles how Taiwan’s economy has been growing more slowly than other advanced countries at a similar stage of economic development. As can be seen in the chart below, since 2000, Taiwan’s economy has been shrinking – the size of Taiwan’s economy as compared to its counterparts has grown smaller as a result of wage stagnation.
Additionally, inward investment into Taiwan is comparatively low, inhibiting economic growth. It’s unrealistic to believe that housing prices will be able to keep growing on the back of economic expansion.In the chart below, countries with higher housing prices tend to have a higher share of global inward direct investment.
Again, Taiwan falls the furthest away from the trendline – Taiwan, with one of the highest housing prices, isn’t receiving a corresponding share of the world’s inward investment.
In other words, Taiwan’s high housing is being speculated through the roof, but speculators are less likely to see meaningful returns than in other advanced countries. The over-speculation of housing is based on mismatched expectations that the economy at its current state cannot meet.
Without a higher level of foreign investment, the speculation in housing prices will only lead to great loss. However, to attract investment, Taiwan needs to increase wages first. It will drive up quality innovation and attract higher-quality talent, which can then transform the country into a vibrant economic hub – but these elements are missing.
Taiwan’s wealthy population chooses to speculate on housing instead of making productive investments that will boost economic growth. The low interest rates have tempted them to grow wealth through housing speculation, but without an economy that can be dynamic enough to grow and catch up, they will have difficulty obtaining profitable returns. These housing speculators have bit off more than they can chew.
These speculators could expect rental return from their housing investments, but Taiwan’s rental yield is one of the lowest in the world.
Taiwan’s high housing prices greatly inhibit rental returns, as can be seen in the chart below. Again, speculators have pushed up housing prices to the point that the returns they can get from their investments are much lower than that in other countries.
In the end, Taiwan’s housing speculators have happily locked up their wealth in housing, which has become overvalued relative to what the economy is able to deliver.
But Taiwan’s excessively-high housing prices have resulted in social problems as well.
Some commenters said that people don’t have to buy homes. They can rent a place to stay instead. But as housing prices soar, rents have also been escalating, the chart below shows.
It should be noted that this rental data compiled by the Directorate General of Budget, Accounting and Statistics (DGBAS)’s Consumer Price Index is underestimated. According to Lee Tsu-fu, a master student at the Department of Economics of National Taiwan University, “more than 90% of the 15,000 rented homes covered by the [DGBAS’s] survey are located in social housing projects, which explains why the CPI for rent does not reflect reality.” Lee explained that data from the 591 rental platform showed that rents had instead risen by a whopping 59.8%, or more than six times the data compiled by DGBAS.
In other words, Taiwan’s rents have been increasing as quickly as housing prices.
Data released by the interior ministry found that rents in six of Taiwan’s largest cities increased by between 4.3% and 13.7% over the last three years, while DGBAS’s data only showed an increase of 3%.
The fast growth in rents has a significant impact on the livelihoods of workers and could lead to increasing dissatisfaction with the government. Forced to pay more and more of their wages into housing mortgage or rents, workers will have less to pay for other basic necessities, and this thereby limits the growth of domestic businesses.
The economy will only expand if businesses across a broader spectrum can profit and grow. But housing speculation in Taiwan has only benefited a small group of people
With housing prices escalating so quickly and rents being pushed up as fast, the lack of policies to solve these problems is threatening to create an economic crisis in Taiwan soon.
Even so, surveys have shown that close to 90% of Taiwanese prefer to own their own homes, and due to the lack of protection for home renters and the preference of landlords not to rent to older people, renting remains an insecure housing option.
The unaffordability of housing is also a cause of declining fertility rate. Over the last 40 years, whenever housing prices spiked, the fertility rate would decline significantly.
Based on 7-year rolling averages, Taiwan’s fertility rate (pink line) has declined in tandem with the growth in housing prices (blue line, on inverted axis), according to the chart below. When housing prices were the highest, the fertility rate was the lowest.
With housing becoming unaffordable, people put off plans to have a family or give it up altogether, leading to a lower fertility rate. When families and individuals have to allocate more income for housing, they have to give up having children, or have fewer children.
Lower fertility rates also lead to shrinking domestic consumer demand and consumption. Slow economic growth and low level of foreign investments have exacerbated the problem.
In order to grow the economy, Taiwan would need to grow wages faster and reduce housing prices significantly, as I have written in previous articles. ButTaiwan’s policymakers and central bank have been reluctant to address this problem in a more systematic manner.
In sum, following years of rapid growth since the turn of the century, Taiwan’s housing prices have become one of the highest in the world today. However, wages have grown one of the most slowly and are one of the lowest and most inadequate among advanced countries. That’s why housing in the country has become one of the most unaffordable, if not, the most unaffordable.
Despite one of the lowest construction costs among advanced countries, housing in Taiwan remains expensive. Behind this phenomenon are real estate companies who are profiting several times more than their counterparts in other advanced countries.
The monkey see, monkey do behavior of Taiwan’s housing speculators has made housing out-of-reach for most people, but not only that, Taiwan’s economy is also not better off. High housing prices have robbed workers of the money they need to spend on other basic necessities, and stifled the growth of other non-real estate domestic businesses providing these basic necessities.
What’s worse, Taiwan’s central bank, which is supposed to implement policies to make housing more affordable, is reluctant to take action. The governor Yang Chin-long said that if young people cannot afford a home, then they should rent one first.
In the first quarter of 2013, the average age of first-time home buyers was 30 to 35 years old, but by the first quarter of this year, it has increased to 35 to 40 years old. Young people are struggling to afford housing. If this goes on, social tensions and instability will ensue.
Taiwan’s mortgage burden is the highest among advanced countries, and even if they don’t buy homes, rising rents are making the lives of workers more difficult. They could hesitate to start a family or have a second baby.
Excessive housing speculation is weakening both Taiwan’s economy and society.
TNL Editor: Bryan Chou (@thenewslensintl)
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