Written by Chieh-chi Hsieh.
If anything is troubling the incumbent government led by the Democratic Progressive Party (DPP), it would not be the external threats imposed by China. On the contrary, China’s continuous assertive actions toward Taiwan have become the DPP government’s greatest asset, enabling the mobilisation of domestic support observed after President Tsai’s National Day speech, which gathered 67.9% of residents’ approval based on a public survey.
Instead, burning issues that may tentatively jeopardise the DPP’s authority would most likely occur at the domestic level. This is notably exemplified in June when the DPP’s party supporting rate plunged to a five-year low of 22.6% after the community outspread of COVID-19. Yet, after local infection rates were reduced to single digit-to-none, the DPP’s supporting rate recovered to 27.1% in October.
Nevertheless, other domestic issues may not share similar attributes as managing COVID-19, where single-digit/zero local infection numbers can swiftly present the effectiveness of government actions and with high media exposure. Property price hikes are one of the current and arguably, most significant issues that would truly challenge the DPP government.
To be clear, the pursuit of housing justice should be defined based on each country’s different socio-economic and political context. Hence, the factor of ‘displacement’ or ‘homelessness’ is not the central theme of this article. Instead, the focus is on whether residents of all income levels are ensured access to safe, affordable residential properties.
No Housing for your Average Joe
Based on the statistics released by a nation-wide real estate company (Sinyi Realty Inc.), the house price index of the majority of Taiwan’s major cities has all surged beyond 200% from 2001 to 2020 (Taichung: 275%; New Taipei: 236%; Taipei: 216%; Taoyuan: 213%; Kaohsiung: 206%). To paint a better picture, the latest price-to-income ratio figures released by the Ministry of Interior shows that the cost of an average residential unit in Taipei is equivalent to almost 16 years of accumulated income.
What is particularly worrying is that property price hikes are occurring in the metropolis and outlying regions. Figures published by ETWARM Real Estate show that average costs per flat unit within a block in Hualien County have risen by 124% in the past decade. The idea of purchasing a residential property seems to be a mirage for your ordinary salaryman in Taiwan.
Policy Responses and Why the DPP is Getting it Wrong
In response, the DPP government and the Central Bank have collectively introduced many policies/laws expected to curb the seemingly ‘overheating’ estate market. First, amongst the many debated resolutions at the Legislative Yuan (e.g. vacant home tax), what eventually materialised was the revision of the Income Tax Act to introduce a new Integrated Housing and Land Tax system. The rationale for this revised property gains tax system is simple: hindering the swift transfer of land and housing ownership. For instance, the first Integrated Housing and Land Tax system subjects a 45% duty on profits gained from property sales transactions within one year, whilst the ‘2.0 version’ demands two years. In addition, the time period for levying a 35% taxation has also been extended from purchases made in-between one-to-two years to two-to-five years.
Second, the Central Bank has also tightened its credit control aimed at curbing the property price hike. Amongst the many include reducing the loan-to-value ratio for land financing from 65% to 60%, cancellation of the grace period of second-homes mortgages purchased in the eight main cities, and increased inspections of loan extensions made by banks to the property market.
However, these policies have met with limited success as November housing sales and prices remained resilient, whilst property sale numbers in Kaohsiung and Tainan have respectively witnessed annual increases of 18% and 16%.
Two main factors explain why the current policy responses have been ineffective and may even deteriorate the issue. First and foremost, hikes in property prices are not merely driven by irrational investing behaviours (i.e., demand-side factor) but also a reflection of increased construction costs (i.e., supply-side factor). Second, Keynes famously adopted the phrase ‘animal spirits’ to argue that financial decisions may not result from rational and calculated contemplation. Instead, market psychology might drive ungrounded high expectations on future returns on investments, which contributes to the emergence of the herd mentality to invest.
Yet, this does not entirely apply to the ongoing real estate market developments in Taiwan. Unlike investments in financial products (e.g. stocks, derivatives), residential properties are ‘actual’ and physical products that entail complex and heterogeneous collaboration between varying upstream to downstream businesses in these construction processes. It involves the procurement of construction materials such as steel rebars, cement concrete, cramp irons for building the exterior structure, and materials for interior fixtures such as aluminium for windows/doors and their frames.
Prices for these materials fluctuate concurrently with international commodity price changes. In the case of steel rebar, the commodity has witnessed an annual increase of 1.92% globally (as of Dec 2021), whilst construction materials such as aluminium also display a yearly increase of 32.68% (as of Dec 2021). Taiwan is not decoupled from fluctuations in international commodity prices. The latest figure released by Taiwan’s Statistics Bureau shows a staggering 13.37% annual increase of construction costs this October: the most significant increase of construction costs since 2004.
In addition, one must not exclude the factor of increased labour costs in calculating construction costs. Particularly with increased domestic investments from high-tech multinational corporations such as Taiwan Semiconductor Manufacturing Co. (TSMC) in Tainan and Hsinchu, these developments have already raised labour costs. A similar effect can be expected in Kaohsiung after the TSMC announced its plan to build a speciality technology fab in November. Therefore, due to the increased procurement prices of construction materials in 2021 and raised labour costs, one can boldly claim that property prices would unlikely down spiral in the coming years.
Above all, an unintended negative outcome may emerge under existing policy responses: creating a monopolised real estate market in Taiwan. Furthermore, one must consider that the construction industry, especially small-and-medium sized enterprises (SMEs), relies on shortening the construction time cycle of projects to maximise their revenues. Yet, existing policies will inevitably prolong this time cycle.
To begin with, existing policies will create higher entry barriers for SMEs, given the country is predominately a bank-based financial system. Although undertaking financial liberalisation since the 1980s, Taiwan still remains an indirect based financial system with more than 50% of corporate financing capital deriving from commercial banks. Hence, although the Central Bank’s credit control measures (e.g., capping the loan-to-value ratio for land financing) aim at solving supply-side issues, it will impose adverse effects on SMEs insofar as making it more difficult for them to procure capital for land acquisition. By contrast, large corporates are shielded from these effects, given their ability to channel funds from the capital market. Thus, increased capital requirement will extend the construction time cycle, which inevitably increases SMEs’ operating costs and substantially reduces their net incomes.
Furthermore, suppose the Central Bank decides to raise official discount rates due to the burgeoning public pressure to tackle inflation. In that case, it will mainly engulf SMEs that primarily rely on bank credits to finance their construction projects. This is not to overlook the fact that Taiwan is an SME-based economy with 78.73% of the country’s labour population employed in SMEs in 2020. Therefore, the potential impact on the country’s economy would be severe. Furthermore, with SMEs exiting the real estate market, it can be expected that large construction enterprises would eventually monopolise the market, creating more significant hurdles to realise housing justice in Taiwan.
Secondly, the new taxation system will also negatively affect SMEs and large construction enterprises. However, a simple aspect that is often overlooked is that large construction enterprises (e.g., Farglory Group, Highwealth Construction) have the more significant financial leverage to maintain their businesses operations vis-à-vis SMEs. As a result, large construction companies frequently adopt strategies of diversification to generate their revenues. In Taiwan, a recent and notable example includes the Highwealth Construction Group’s investments in supermarket chains, furniture businesses, department stores and shopping centres over the past two years.
For the latter, given the construction industry is a capital-intensive business, SMEs cannot diversify their businesses. Furthermore, if they adhere to prudential management strategies, a significant proportion of their procurement of funds should derive from their net incomes together with bank credits (e.g., land and construction financing). Thus, reduced property sales volumes would indicate a prolonged marketing and sales period, increasing operating costs and reducing these SMEs’ profit gains. This will create an unfavourable business environment for SMEs to sustain their operations and eventually lead to their exit.
To sum up, the DPP government has managed the COVID-19 pandemic astonishingly and put forward firm and well-articulated Cross-strait policies that resonate with the majority of Taiwan’s residents. Moreover, with geopolitical dynamics shifting towards the goal of Taiwan’s meaningful engagement bilaterally (e.g. Germany’s ‘traffic light’ coalition government) and multilaterally (e.g. Netherlands’ support of Taiwan’s participation in Interpol) regardless of China’s opposition and retaliation (e.g. the opening of Taiwanese Representative Office in Lithuania), one can expect the DPP government to continue to benefit from diplomatic breakthroughs to remain as the most dominant party going into the 2022 mayoral election, and the 2024 presidential campaign.
Yet, the DPP must take notice that they no longer merely face the challenges imposed by the Kuomintang. Instead, the Taiwan People’s Party led by Taipei Mayor Ko Wen-je has recently surpassed the KMT as the second-largest party based on party supporting rates. Thus, the pursuit of housing justice will be a significant issue that the DPP must cautiously tackle to succeed in upcoming local and national campaigns.
Chieh-chi Hsieh received his PhD from the Department of Politics and International Studies, University of Warwick (UK). He also holds an MSc degree in International Political Economy at the Department of International Relations, London School of Economics and Political Science. You can follow him on Twitter @DrHsiehCC