Housing prices across Taiwan have more than doubled since 2008. In Hsinchu and some neighborhoods in Taipei City, the increase is even larger. 

There is therefore a widespread view that Taiwan faces a housing affordability crisis, that a young person could save for all their lives and still not be able to afford an apartment. 

But high housing prices does not necessarily imply that housing is unaffordable. Whether housing is affordable depends on the rent or the cost of owning a home as a share of income. A rule of thumb is that 30% is reasonable and above 40% is a housing affordability crisis.  

Whether the doubling of housing prices in Taiwan implies that either rents or cost of owning a home have increased depends on why exactly housing prices have increased.

To understand the link between the price of housing and the rent or the mortgage payment, think of the following scenario.  Suppose a family is choosing between renting a house or borrowing money to buy a house and paying the mortgage on the loan.  If they choose to rent, the cost of housing is simply the rent.  If they choose to buy the house, the cost of owning the home is the product of the interest rate and the price of the house (the mortgage plus the down payment) , after subtracting how much they expect the value of the house to increase in the future.  

If the cost of renting is lower than the cost of owning, then nobody will buy and the price of the house will fall.  On the contrary, if the cost of buying a house is lower than the rent, then everybody wants to buy and the price of the house will increase.

The equilibrium is therefore when the price of the house is such that the cost of renting is exactly equal to the cost of owning a home. This logic therefore says that there are three reasons why housing prices have increased in Taiwan.  

The first is that rents have increased, or equivalently the mortgage payments (and the foregone interest on their down payment) that families have to make, have increased.  And if these costs have increased by more than income, then this would obviously be a housing affordability crisis.  

The second is that rents may not yet have increased relative to income, but they are expected to increase in the future.  In this case, mortgage payments will increase but the cost of home ownership will not.  High mortgage payments are what households pay for the expected capital appreciation from the future increase in rents.

The third is that interest rates have fallen.  If this is the reason why housing prices have increased, then there is no housing affordability crisis.  Housing prices have increased, but if the only reason why they have increased is because of lower interest rates, then the cost of buying (or renting) is exactly the same.  In this scenario, the increase in the price of housing has no effect on what families have to pay for housing.

Interest rates in Taiwan fell to historic lows between 1998 and 2021.  Lower interest rates and higher housing prices was not just a phenomenon in Taiwan.  Interest rates fell and housing prices increased throughout the world.  The same logic holds for stock prices which also increased throughout the world over this period.  The basic fact that interest rates fell suggests that at least part of the runup in housing prices in Taiwan had no effect on the cost of housing in Taiwan.   

But surely rents or the cost of buying a house have also increased as well? Here the evidence is less clear. We can not directly measure the implicit rent of owner occupied housing. We do not observe the payments made by the owner of a house to themselves for living in the house.  And here it is important to remember roughly 80% of housing in Taiwan is owner occupied.  These families are unaffected even if the cost of the implicit rent they pay on their house has increased.  

Of course, many of these households do not fully own their housing, and some households rent. Could they be paying more for their housing?  The best that we can do is to measure market rents.  This is problematic for housing markets like Taiwan where the rental market can be a small share of the housing stock in many cities. When the rental market is small, houses that are rented can be idiosyncratic and not representative of the housing stock of the average family.  

With that limitation in mind, data from Taiwan’s Department of Statistics from a sample of rental prices from identical houses indicates that rents increased by 7% between 1998 and 2021. Over the same period, average disposable income per person in Taiwan increased by 51%. So if a typical Taiwanese family spent 30% of their income on housing in 1998, that share fell to 21% by 2021. 

Is the 7% increase in housing costs too low? Using a larger sample of rental market transactions, a student at NTU estimates that housing rents increased by 59.8% between 2008 and 2021. However, this estimate is not based on a sample of identical houses over time, and we know that the quality of the average house in Taiwan has improved.  

For example,  the size of the average home in Taiwan increased from 39.8 to 45 ping over this period.  Therefore, it is likely that the 59.8% number overstates the real increase in rents because it includes the effect of better housing.  

But suppose we take this 59.8% number as the truth, assuming an initial share of housing costs in income of 30%, this implies that the cost of housing as a share of income is 35.9% by 2021, which is still below the 40% threshold.

Of course this does not mean that no one in Taiwan faces a housing affordability crisis.  Some families in Hsinchu or in Taipei City could be paying more than 40% of their income on housing.  But the evidence is that their experience is not representative of the average Taiwanese family.  And since the families in Hsinchu or Taipei City are likely to be wealthier than the average Taiwanese, the question is whether the average Taiwanese should be taxed to solve their housing problem.

But the more important issue is that interest rates have increased since 2021 while housing prices continued to increase.  At the same time, there is no evidence that housing rents have increased by nearly as much as housing prices after 2021. Official data from Taiwan’s statistical bureau indicates that rents increased by only 2.6% in 2022.

The combination of higher housing prices, higher interest rates, and modest increase in housing rents after 2021 suggests that the increase in housing prices after 2021 is driven by the belief that housing prices will increase by even more in the future.

So households that purchased housing after 2021 are paying much more in mortgage, but an increasing share of their mortgage payments is payment for expected capital appreciation, and not the actual cost of owning a home.

The danger is that the price of housing can only increase in the future only if its value in terms of housing services – the rent – also increases in the future.  It is hard to know whether this will happen, but the fact that rents have not increased substantially in Taiwan suggests that it is unlikely.  

This then suggests that higher housing prices (and mortgage payments) since 2021 is a housing bubble that will eventually crash. This is what happened in the US between 2000 and 2008, and led to the great financial crisis.  This is also what China is going through right now.   But the danger of a housing price bubble is not when housing prices increase – the US economy boomed during the housing bubble – but rather what happens when housing prices fall.  

Families that fully own their houses – and this may well be the majority of families in Taiwan – will be unaffected.  However, families that have taken on large mortgages during the bubble can find that their house is worth less than the mortgage. This can lead to severe financial distress when some of these families default on their loans.   

This seems to be the main risk to Taiwan from higher housing prices. The danger is not housing affordability but rather a housing bubble that will eventually collapse.  

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About the Author

Chang-Tai Hsieh is the Phyllis and Irwin Winkelried Professor of Economics and PCL Faculty Scholar, University of Chicago Booth School of Business.

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