Taiwan's Inflated Real Estate Market
How to Buy a House in a Bubble
After record low interest rates, a luxury property boom and the opening of links with China have floated the real estate market to historic highs, is Taiwan now plagued with a property bubble? And how can an ordinary mortal purchase a home?
How to Buy a House in a BubbleBy Yi-Shan Chen, Elaine Huang
From CommonWealth Magazine (vol. 403 )
Summer 2008 is turning out to be a time of confusion for the Taipei housing market.
On July 16, Cathay Life Insurance – the largest landowner on the island – made its first public land purchase in three years at a record-breaking NT$3,010,000 per ping (a unit equivalent to 36 square feet) – or about US$2660 per square foot. Just 10 days later, Shin Kong Life Insurance sold a parcel of land in the Xinyi District for a new record of NT$4,067,000 per ping – just under US$3600 per square foot. But the celebration was short-lived – three days following the new record, the National Central University Consumer Confidence Index showed the consumption of durable goods to be at its lowest since February 2003, a bad portent for the future of the housing market.
In the midst of these contrasting signs, what is the true state of the market?
What Goes Up, Must...
According to the Real Estate Sentiment Monitoring Index published by the Ministry of the Interior's Architecture and Building Research Institute, major housing market indicators have been slipping for four consecutive quarters since the second quarter of last year, flashing a yellow-blue light representing market retraction. National Chengchi University land economics professor Chang Chin-oh interprets this as a definite market downturn.
Using the listed company Sinyi Realty as a barometer for real estate trade volume, we see that its earnings reached a record high of NT$942 million this March, then the entire market suddenly froze, and by June Sinyi's earnings had been sliced nearly in half, to NT$477 million.
"This boom has lasted longer than any other, for four-and-a-half years – a full two years longer than expected," says Benson Liao, president of Yungching Group and Yung-Ching Real Estate. Over the past two years, developers have used international pricing comparisons and the opening of trade links with Hong Kong and China to keep prices high.
How much have prices over-inflated in the past two years? According to Chang Chin-oh, Taipei City and County are hardest hit by the current housing bubble. The prices of some luxury residences near the Kaohsiung Museum of Fine Art and in Taichung's 7th Redevelopment Zone are also inflated.
According to a report by Chang on Taipei's housing bubble, the current price per ping for pre-sold real estate in Taipei City is NT$537,300. Of this amount, 38 percent, or NT$202,700, is directly attributable to the speculative bubble.
Strangely, while all market indicators show a marked decline in sales, Cathay's second quarter construction index still shows price quotes for Taipei's new property holding steady. Chang Hsin-ming, a marketing consultant with US-based ERA Real Estate who has studied the Taipei market for 20 years, concludes that this price rigidity is due to the psychology of construction firms, which prop up prices however they can up to the very last minute, rather than giving into across-the-board reductions, and only concede with veiled rhetoric that "the room for negotiation has expanded."
Hua Ching-chun, associate professor of finance and banking at Hsuan Chuang University, predicts developers will use a wide variety of incentives and promotional campaigns over the next two to three years, offering free parking spaces or complimentary interior decoration, exempting buyers from a down payment with just an ID card or business card, or holding garden parties to draw impulse buyers. "But in the end," Hua concludes, "prices will still come down."
Benson Liao observes that after remaining frozen for four months, sales prices have dropped 5 percent in Taipei City and 15 percent in Taipei County. With the price decline, however, Yungching's sales volume had already returned to normal by the first week of August.
Where can we find real estate worth buying? Author Kenichi Ohmae suggests in his book Business Polishing Power that in the age of the bubble economy, consumers should base their choice on commuting time, and look for areas where price increases have been relatively low.
Rule No. 1: Look for a place within a 30-minute commute, with a price increase below 40 percent.
A comparison of Taipei suburbs that lie within a 30-minute commute of Taipei Main Station (Taipei's central transportation hub) along Taipei Rapid Transit System or train lines, or will do so via new lines to be completed in the next three years, reveals that the areas with the highest price increases for new houses over the past four years have been Banciao City at 70.7 percent, Sanchong City at 66.7 percent, and Sinjhuang City at 62.7 percent. These areas are not advisable for those purchasing with the expectation that prices will rise further.
In contrast, real estate prices in Jhonghe City and Shulin City have risen more modestly, without surpassing 40 percent, and the prices of new and used houses have risen to a similar degree. This indicates increases of a more realistic nature.
Rule No. 2: Avoid areas with too many unsold properties
Liao believes that while distance is one factor, buyers must also consider supply and demand, and stay away from areas with a large number of unsold properties. While prices in Sansia Township and Linkou Rural Township have not risen overmuch in the current housing bubble, they may very well decrease nonetheless, as supply exceeds demand.
Areas like Danshui Township and Lujhou City, where construction projects are numerous and prices are greatly inflated, should definitely be avoided.
Rule No. 3: Avoid Unfavorable Purchasing Periods
Honda Appraisers Joint Firm president Alpha Jwo also suggests that consumers be careful to avoid paying top price for residences that will stand along mass rapid transit lines in the future. Transportation-related construction projects usually increase in price at the time of their announcement, decrease in price during construction, and increase again when the project is near completion. When the project is fully completed, the advantageous conditions will have already been exhausted, and prices will drop in the short term. Consumers need to avoid purchasing at peak periods. As reference, the mass rapid transit system lines to Lujhou, Sinjhuang, Neihu, and to the Taoyuan International Airport as far as Sanchong are due for completion in 2010.
"It's a buyer's market right now," says Liao. Prices in the greater Taipei area have not stabilized, and therefore sales are down. He predicts a 10- to 20-percent drop in Taipei property values within the next two years, and a 30-percent drop in Linkou, Danshui and Sansia, where there are a large number of unsold properties.
He also suggests that as the pre-sold housing market is in disarray, it is better to buy a completed property if there is not enough time for a thorough price comparison. Both Yungching and Sinyi have databases that offer price comparisons between completed and pre-sold homes, and consumers would do well to do a search on similar properties.
"The real estate market won't be good for another two years," asserts a conservative Chang Chin-oh. Rather than dealing with pricing risks, the safest strategy may be to wait two years to buy.
Translated from the Chinese by Ellen Wieman
Chinese Version: 房市泡沫 如何買屋？