In Japan, following the real estate bubble burst in the 1990s, a paper published by the Asian Development Bank Institute found that “allocating too much capital into real estate can also damage growth of small-to-medium-enterprises (SMEs), the backbone of the economy, as banks allocate more credit to the construction and purchases of real estate rather than SMEs.”
In Taiwan, excessive speculation might also cause the housing market to burst. According to Lee Ming-hsuan (李明軒), professor of political economy at the National Sun Yat-sen University, the average effective property tax rate is only 0.12%, which she explained is “a burden far below that seen in the world’s major cities.” At the same time, Taiwanese homeowners pay property taxes that are just one forty-eighth of the amount their American counterparts pay for housing of similar price and age.
Financial historian Edward Chancellor explained, “when interest rates are pushed down too low, people are driven into speculative endeavors and chase returns..” Low interest rates “[facilitate] speculative trading instead of a focus on real economic growth,” and are “an unsustainable monetary policy that just won’t work moving forward.”
In his book The Price of Time: The Real Story of Interest, Chancellor said over the last five thousand years, “speculative bubbles and ugly consequences manifest from interest rates being kept too low for too long.” The government needs to raise interest rates to reallocate capital to more “productive purposes rather than generating speculative paper profits.”
This finding is especially relevant for Taiwan, which has seen soaring housing prices yet slow economic growth.. An excessive amount of capital has been flowing into the housing market as the innovation capability of the country lags behind. The economy has also become less diversified as output in most productive sectors (except semiconductor, computer, and electronics production) weakens. As a result, Taiwan’s global share of advanced production has been declining over the last 25 years. In comparison, the share in South Korea, China, India, and Mexico have all increased.
To prevent a housing crisis, either housing prices need to come down, or wages need to increase dramatically. Taiwan’s policymakers need to raise interest rates to effectively bring down housing prices. According to a study published by the International Monetary Fund (IMF), an increase of real short-term interest rates by 1% can help reduce housing prices by 3.61%.
Additionally, a study of 18 OECD countries found that lower taxes for the rich don’t significantly enhance economic growth, but worsen income inequality. To bring down housing prices, policymakers need to not only raise mortgage rates, especially for those with multiple houses, but increase personal income taxes for those in the higher income brackets.
Another factor behind the rising housing prices is the public land auction system, in which the highest bidders win the right to purchase public land. The system has led to intense bidding in some areas, driving up land and housing prices. The government needs to recognize its role in driving up property prices and reform the system.
Instead of selling public lands, the government should adopt a more progressive income tax policy to generate revenue. There should also be stricter regulations prohibiting builders from pricing housing units above land costs. And if land sales are being used to benefit connected policymakers and businesses, then corrupt officials need to be investigated, and stronger measures need to be created to penalize them, and those benefiting from these schemes.
The government should also develop other innovative methods to address the housing crisis, such as by implementing differential interest rates pegged to income levels or the number of housing units owned by individuals or companies. The government should also facilitate the formation of more citizen-led co-operatives such as those in the Nordic countries, build homes solely for personal residence, and set aside land for such purposes. In Norway and Sweden, co-operatives comprise 15% and 20% of the total housing stock, respectively.
The housing crisis has dangerous ramifications for Taiwan’s economy and society, and it’s time that the government take firm steps to resolve the issue.
Redirecting energy into productive enterprises
What is all the housing speculation for? Investing in real estate to accumulate wealth is premised on an expanding economy, but Taiwan’s economy has shrunk relative to other advanced countries at a similar stage of economic development. The lack of investment in productive enterprises makes Taipei less attractive than other global cities as an investment destination.
Without commensurate growth and development in the economy, speculation pushes up housing prices and leads to overvaluation, which hurts both genuine home buyers and investors. Home buyers will not be able to afford homes to live in, while investors will not be able to receive high returns. Consequently, Taiwan moves towards being asset rich, but cash poor, and Taiwanese people not having enough money for basic necessities.
In the end, housing speculation only benefits a small group of people, but leaves the rest of the population worse off.
To make real estate a sensible investment, Taiwan has to put effort into growing the economy and making it more attractive for investment. It requires faster wage growth, which increases domestic demand and generates higher revenue and profits for domestic businesses. A stagnant economy predicated on excessive housing speculation cannot do any of these in any sustainable manner.
Today, Taiwan faces a reckoning. Does it want to continue on the path of over-speculation and create further instability, or does it want to nip such carelessness in the bud?
Taiwan is at a turning point. Everyone needs to come together to decide on the Taiwan they want to create. If we want to protect Taiwan’s democracy, how do we want to do it? Is it one where we continue to allow a few people to get ahead and cannibalize the rest, or do we want to create a more equal Taiwan where everyone can benefit more, and make Taiwan better together? We have a chance to embark on a different path.
With the housing crisis unresolved, Taiwan’s economy and society will face a breakdown. Given the growing national security threats from China, policymakers’ refusal to confront the problem puts the country in a highly precarious situation.
In the face of threats from China, the best Taiwan can do to protect itself is to ensure that each and every individual in this country is well-protected, so that they will do their best to protect their homeland. Every neglected or abandoned individual is a crack in national security.
If we truly believe in a democratic Taiwan, then we need to start practicing what we preach. The only way to truly protect Taiwan is to ensure that every Taiwanese is protected, paid fairer wages, and lives in a more equal and just environment. Only then will Taiwanese feel more secure, and commit themselves to protecting this beautiful country. If we do not create stronger systems to protect the weakest in society, then what does it say about Taiwan's democracy?
Otherwise, we might have to wait for the housing market to crash in due time, and by that time, Taiwan will learn the painful lesson of relying on productive and sustainable means to grow the economy. Taiwan has faced such a crisis before, and so have our neighboring countries. Instead of sitting and waiting, Taiwan should sit up now and take the housing crisis seriously.
TNL Editor: Bryan Chou (@thenewslensintl)
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