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Real Estate Rage

Our Land, Their Luxury Homes


Our Land, Their Luxury Homes

Source:Kuo-Tai Liu

In Taipei salaries are stagnant, but housing prices soar, lifted ever higher by the luxury real estate market. What can be done to restrain rampant property speculation and defuse mounting anger?



Our Land, Their Luxury Homes

By Yi-Shan Chen, Jimmy Hsiung
From CommonWealth Magazine (vol. 445 )

People want songs they can call their own, but the tune recently embraced by Taiwan's middle class has been decidedly off-key, tinged with resignation, anger and despair.

Lee Hsing-chang, the leader of the Snails Without Shells Alliance who led a sleep-in on Taipei's high-rent Zhongxiao East Rd. 21 years ago to protest unaffordable housing prices, once again mobilized protesters to take to the streets on March 26.

"The government only consults with big businessmen and developers' associations. It has never listened to the voice of those who want a home in which to live a peaceful life," an alliance statement said. "It's time to use ballots in the year-end elections to express our anger."

Premier Wu Den-yih responded, however, that property prices are determined by supply and demand, and that there was little that could be done to influence the price of Taipei's prime real estate.

"I don't have that ability, and prices should not be suppressed anyway. Real estate is one of the locomotives of the economy, and now that it is finally starting to catch fire, to try to put a lid on it would send the entire economy down," he said.

But can the simple dictum of "supply and demand" really explain Taipei's skyrocketing land and housing prices?

Source of Anger No. 1: National Land, Private Penthouses

The sale of national land for development, which should restrain property inflation, has actually fueled price speculation in the Greater Taipei area after publicly held lots were recently auctioned off for record-high per-unit prices.

To understand how publicly held national land in Taipei has been used after being sold to the highest bidder, a CommonWealth Magazine team first scoured National Property Administration records and media reports from the past 10 years to compile a list of the 50 lots that were auctioned for the highest prices and then checked their status by asking developers or visiting the actual sites one-by-one. The result: 26 lots had been or were being turned into residential developments, while 22 lots remained undeveloped. The remaining two lots could not be found.

Of the 26 developed locations, only three offered average-sized apartments under 40 pings (one ping equals 3.3 square meters or 36 square feet). Another 18 only offered big floor-space units. In other words, at least 80 percent of Taiwan's national land that has been auctioned off is either being hoarded by developers or built into big residential units that the average person cannot afford. These auctioned plots, which in the past may have been used to build public housing, have made no contribution to the mid-range residential property market.

Of the 22 lots that remain vacant today, many of which sold for astronomical prices, the one that has been held the longest was auctioned off in September 2005 and is located in a side street off Hangzhou South Rd., Section 1. The most expensive of the vacant lots, located on the corner of Xinyi Rd. and Jianguo South Rd., was sold in a public tender in March 2006 to Shin Kong Life Insurance. Shin Kong Life then sold it two years ago to Cathay Life Insurance vice chairman T.Y. Tsai and Yuanlih Group chairman Lin Min-hsiung for NT$10.1 billion.

Source of Anger No. 2: Allowing Developers to Hoard Land

The owners are willing to hold on to such expensive land without developing it in part because it's perfectly legal.

From the developers' perspective, "I'm playing by your rules of the game, so you can't criticize me for hoarding land," says Alpha Jwo, the chairman of property appraiser Honda Appraisers Joint Firm. "The key is that the government needs to take action and pressure landowners until they can't take it anymore and feel they have to develop their land."

Taiwan's convoluted property tax system also keeps the cost of holding vacant lots quite cheap.

Land in Taiwan has four different values. Aside from the actual market price, there is the "publicly announced land value," which is adjusted once every three years, the "reported current land value," which is the value reported by landowners used to calculate the land tax and can be up to 20 percent higher or lower than the publicly announced land value, and finally the "assessed present land value" on which land value increment taxes (similar to capital gains taxes) are based.

The World's Most Backwards Land Tax System

Taiwan's houses also have two prices -- the actual market price and a "standard unit price for housing construction" set by the tax revenue offices of each local government for residential units under their jurisdiction. This publicly assessed price has not been adjusted for 27 years. Legislator Lai Shyh-bao estimates that the current "standard unit price" is roughly only one-fifth of the actual market value.

The lack of transparency in real estate transactions has also contributed to strange practices. Jwo explains that many property transactions in Taiwan involve three contracts. There is a "public contract," drawn up to show government tax offices, a "private contract," which lists the actual terms of the deal, and a "fake contract," to use to apply for a mortgage.

In the "fake contract" the value of the property is inflated. For example, if the actual sales price is NT$10 million, the "fake contract" will state a price of NT$13 million, so that if the mortgage is for 70 percent of the fake contract's value, it will actually cover close to 100 percent of the property's actual value.

Chang-I Hua, an adjunct professor at National Taiwan University's Institute of Building and Planning, argues that the problem with Taiwan's land tax system is not low tax rates but rather the tax base. Of all local governments, Taipei City's present assessed values most closely approximate actual market prices but are still about 30 percent below market. The publicly announced land value is 60 percent below market value. Consequently, while land and housing tax rates may seem high, homeowners' tax burdens are only about one-tenth that found in the United States, according to Professor Hua.

"Because the cost of vacant houses and vacant land is so cheap, everybody buys residential property as if they were buying gold – if you have money, buy it and put it under your bed for safe keeping," he says. As to how many vacant apartments there actually are in Taipei City, nobody really knows.

The combination of an increase in demand caused by this speculative investment and the shortage of land claimed by developers has triggered a sharp rise in property prices.

But considering the amount of land being held by developers, the supply of land in Taipei is not as tight as some are saying.

Peizhi Chang, director of the National Property Administration, doesn't buy the claims of a "land shortage" in the city. He says that only 44 percent of the public land parcels put up for auction in Taipei in 2009 were actually sold.

"The truth is that developers are smart. They used news of the high price of auctioned land to push the value of their own land higher," Peizhi Chang asserts.

Source of Anger No. 3: Uneven Legal Protection

A basic tenet of economics is that markets where information is asymmetric tend to malfunction. The Urban Renewal Act has been repeatedly amended, making it easier to renovate or rebuild properties, but average homeowners are information-disadvantaged and, when threatened with reconstruction projects they oppose, feel powerless to protect their own homes. This is another significant cause of real estate rage.

Overseas, urban renewal campaigns usually serve to hold long-term property prices in check, but in Taiwan, it has had the opposite effect on older residential buildings.  

"The government's publicity on urban renewal has sent the wrong message. It has stressed building new houses and making money, but the problem is that the promise of profits is targeted at developers. To the people who want to continue living in their original locations, the emphasis should be on rebuilding their homes," says Eric Lee, who works in First Bank's Urban Regeneration Department.

"I often tell people who ask me about urban renewal that if you want to generate a high selling price, then talk to a developer, because only a developer has the capability to build a luxury residential property. The problem is that once the luxury building is up, you'll be kicked out!"

By creating the wrong impression from the beginning by equating urban renewal with making money, the government's urban renewal publicity campaign has resulted in locations that cannot turn big profits – those that are usually in the most desperate need of renovation – being ignored. Architect Shu Chang, a member of the Taipei Urban Planning Commission and the architect who designed President Ma Ying-jeou's house, notes that the Taipei City government designated more than 30 "rundown areas" in the Datong and Wanhua districts for the first stage of its urban renewal program, but did no renovation in those areas, due to lack of funds.

After regulations were loosened to allow developers and individuals to get involved, urban renewal projects began popping up in districts where the real estate market was strong, with the wealthier Wenshan and Daan districts leading the way. The result is that urban renewal is only happening where a good market already existed.

The government wanted to entice developers and the private sector to help quickly beautify the city, but because developers are out to make money and residents don't want to be put at a disadvantage, the cost of changing to a new home is therefore borne by taxpayers.

Urban Renewal Doesn't Serve the Public Good

Urban renewal is entirely profit-oriented, but the beneficiaries reap their gains under the pretext of fulfilling the public good by beautifying the city. Apartment owners want to strike gold by increasing the floor area ratio (ratio of total floor space to the area of the land on which the building sits), at the expense of other city residents.

Taiwan's political and business circles have also joined together in aggressively promoting the concept, which is why the Urban Renewal Act has been amended more often – seven times in 12 years – than any other piece of legislation. An eighth amendment is in the works that would undermine residents' rights even further if passed. It stipulates that if only five or fewer households oppose an overhaul of their building, the police can be called in to forcibly evict them. Also, it would cut the "public review period" to 15 days from the current 30 days.

The draft amendment would also ease restrictions on developers. Once the screening committee has approved an urban renewal project, developers would have six years rather than the current one year to complete the work. "It doesn't let the people get a look at the project, but it allows developers to sit on the land," says Chang Wei-hsiu, a member of the public interest group "Front of Saving Public Assets."

"The law has never protected good people. It protects people who understand the law," says First Bank's Lee. Developers currently exploit their information advantage, but once homeowners become more knowledgeable about urban renewal, the developers' edge will narrow. In Japan, urban renewal is now almost exclusively undertaken by the private sector. The renowned Tokyo Midtown complex completed last year was conceived by a bank.

Source of Anger No. 4: The Government Sits on Its Hands

Soaring housing prices, a backwards property tax system and controversies surrounding urban renewal have all irked Taiwan's middle class. But it is even more angered by the realization that while the government sees and understands the importance of these problems, politicians are all held hostage by the system.

An employee of a prominent company, who is active in government-private sector associations, says that in today's political environment, only the profits on land speculation are sufficient to support an elected official. "Any election campaign now requires at least NT$100 million. Politicians won't have enough if they only rely on cuts from public works projects," the source asserts.  

Because of these complex symbiotic ties between politicians and the business community, local governments never adjust the standards for the "publicly assessed land value," "assessed present value," or the "housing assessment value," all of which they have the authority to change without amending any laws at all. NTU's Hua vividly recalls the reaction he got when he suggested to a county chief that he increase the publicly assessed values of land and houses to ease the county government's financial woes.

"He shook his head vigorously and said to me, ‘You're an academic who doesn't have to deal with reality. I still have an election ahead. No way. No way.'"

Four Remedies to Dissipate Public Anger

To deal with the middle class's litany of complaints, the first step is to make actual real estate transaction prices more transparent, which, as seen above, is unappealing to politicians because it would increase the tax burden of their property-owning constituents.

However, Joseph Wu, a senior manager in PricewaterhouseCoopers Taiwan's Tax and Legal Services division, believes the resistance most people have to higher taxes is not insurmountable. In the United States, local governments can discount taxes on assets (such as property) based on the financial situation of the locality. Taiwan's government, Wu says, could insist that actual transaction prices "float to the surface" and then use them to first assess the land value increment tax. The annual land and property taxes could then be discounted to dissipate the resistance of homeowners.

Second, if it is not possible to implement a system based on actual sales prices, the government could create an independent real estate appraisal panel to set "publicly announced land values."

"It's a matter of breaking free from the clutches of the tight alliance between government and business at the local level," Hua says.

Third, pass the draft "National Land Planning Act." Based on the draft legislation, the central government will be able to delineate protected areas, areas for urban and township development and farming areas, and also set guidelines on urban and township planning and the height of city skylines, for example. Once the guidelines are set, local governments will follow.

Fourth, in the short term, to prevent the hoarding of land, deadlines should be set for the development of any national land sold by tender. Asset management regulations governing the life insurance sector already clearly stipulate that land bought by life insurers must be developed within two years of purchase to eliminate land hoarding and speculation.

Translated from the Chinese by Luke Sabatier