In Taiwan, more and more new graduates feel exhausted about chasing the IDEAL life since daily essentials, transportation fees, and the house rent almost takes most of their salaries. They are letting alone buying a car or buying a house. We can see the following Property Prices Index 2021 Mid-Year from the following chart. As Taiwanese, we have to work for over 15 years without spending money (or 30 years of disposable family income) to buy a house in Taipei. Most graduates blame the high housing price problem on the increased demand. So today, let’s explore whether the high housing price problem is due to supply and demand.
Housing has two economic functions: 1. Living value 2. Exchange value (financial product)
High housing prices have created false economic prosperity for the government. Real estate appreciation seems to increase GDP, but it has neither increased productivity nor the ability to stimulate consumption. According to the Central Bank News Reference, Taiwan’s real estate loans accounted for more than 50% of GDP in 1991–2020, which means banks have given most of their loans to the real estate market rather than enterprises and companies that need them to engage in production. Only the bank credit cycle of productive loans (when bank loans are creating new money) is the actual promotion of the production activities of investment entities.
Bank credit cycle
Since the amendment of the law (easing restrictions on loans to banks for housing mortgages), banks have become more inclined to housing loans (because the risk is lower than loans to enterprises). The more housing loans are issued, the more significant the increase in housing prices, land prices, and housing prices. It seems to have brought colossal wealth growth to Taiwan, but it has not brought real value-added to Taiwan. When people get more loans, their consumption power will decrease, business income will fall, and company investment will reduce. From the employee’s perspective, the general salaries will lower, and per capita income will be reduced (banks even introduced mortgage securitization to reduce risks). When people cannot repay the loan, it is likely to trigger a real estate bubble (house-finance feedback loop), which explains why building more houses and increasing supply will not reduce house prices. When the transaction value of the home is greater than the living value, when it becomes an investment financial product, the soaring housing prices are no longer due to supply and demand issues. In this case, the principle of supply and demand cannot be applied to the real estate market. It is derived from the scarcity of land (not total production) and is unique (the value of each lot is different). The price of specific land must rise due to development, which will lead to an increase in housing prices, thus driving the growth in regional housing prices.
From venture capital, why has Taiwanese venture capital not thrived in the past twenty years? The risk-reward ratio of investing in real estate is low; the government hardly dares to cool off the housing market(political factors). It cannot substantially eradicate the problem (increased housing prices bring GDP rise), and the current degree of bank stability is closely related to housing. If the government sells accommodation, it may cause banks to tighten their loans to companies. The success rate of entrepreneurship is minimal. If the average person has 5 million, investment in real estate may be the more stable and higher yield option.
In Why can’t you afford a home? by Josh Ryan-Collins mentioned three methods
1. Financial reform: the government must direct capital to production, not real estate.
Government should intervene and create an environment that is friendly for the entrepreneurs to get loans from the bank. For example, After the Second World War, Singapore, South Korean Government created Credit Control. The central banks will set an expected GDP growth rate and use this goal to estimate the total loan amount needed, and finally, allocate these loans to various banks and companies. Meanwhile, limiting the real estate loans by stipulating high-interest rate policies. The key is to direct the capital to production instead of property and real estate.
2. Tax reform: increase taxation, house-hoard tax, increase house holding cost
By increasing the tax, the government can reduce the incentives for holding houses for speculation and justify its value from investment financial product to its original housing value. House-hoard tax is better than individual income tax as government revenue because it will not decrease consumption. House-hoard tax is always imposed on the affluent class, which will not influence their daily consumption.
3. Land reform: the government purchases land to develop new towns, etc.
In other words, public ownership of land is the way to ensure the public interest, such as highways, parks, and public housing. For example, the Singapore government confiscated land to build public houses; still, over 80% of the Singapore population lives in public places. The property price to income ratio of Singapore is the lowest in Asia.
Making the house not a financial commodity but a daily necessity is a way to solve high housing price problems.
The operational contradictions of capitalism have become more and more apparent. More and more funds flow to real estate; on the other hand, the public is facing low wages, and companies earn all the money they use to pay rent, creating a vicious cycle. The government can receive more taxes from labor and companies but less income from real estate in the long run. Therefore, tax reform is imperative, but the question is whether it will happen before the real estate bubble bursts.
