2020.10 The Taiwan Banker NO.130 / By Hank Huang (黃崇哲)
Financial Stability Depends on the Real Estate MarketEditor's Note
Central banks have responded to the pandemic-induced downturn by sharply lowering interest rates and firing up their money printers, driving hot money into real estate. Prices and transaction volumes in a number of markets have begun to rise. Taiwan, which is no stranger to real estate speculation, looks increasingly attractive to global investors thanks to the trade war and related divestment in Chinese supply chains, as well as its effective containment of covid-19. The combination of foreign capital supply resulting from quantitative easing, with the return of Taiwanese capital from China, has buoyed the stock, mortgage, and real estate markets. For the real economy, however, this growth is not necessarily a boon. There is an increased risk of the economy overheating or a property bubble. Fortunately, the real estate markets that have seen sharp growth – including Hsinchu, Taoyuan, and Tainan – all neighbor science parks and processing or export zones. The shifting of supply chain away from China has caused factories to expand their investment in Taiwan, boosting housing demand as new jobs are created. This gives Taiwan an opportunity for more balanced development, with less of a singular focus on the greater Taipei area. Furthermore, consumer demand, driven by the high-tech industry, could also shrink the urban-rural gap, leading to new lifestyle patterns and trends. Amidst this prosperity, it’s becoming more important for the financial industry, which has become heavily concentrated in real estate lending, to maintain vigilance against bubbles. This is all the more important given that Taiwan's population began decreasing this year. If the increased loan issuance to the elderly over the next two years impacts the balance of real estate supply and demand, the financial industry should ask itself if continued opportunities will appear for large price increases. Recent price increases and non-performing loans in some regions indicate that real estate investment has returned. Taiwan really needs steady market growth, not blockbuster profits and skyrocketing prices. On balance, a guaranteed supply of housing is the government’s most important objective. A renewed frenzy of speculation will only impede Taiwan's drive to provide more equal housing opportunity, especially for the younger generations. Over the past four decades, starting from Japan in the 1980’s, and also including the US, New Zealand, Australia, Ireland, and Spain, sharp increases in housing prices have preceded declines, impacting the systemic stability of the financial system, and verifying the ironclad law that a stable housing market growth is the cornerstone of financial development. After all, in "normal times," market supply and demand determine housing prices. Yet when hot money pours in, leveraged speculators may drive up prices in a way that transfers risk to society as a whole. This type of correlation is one of the reasons that financial supervisors have been developing the macroprudential approach to regulation. With the new jobs resulting from industry development, Taiwan can balance regional development and improve housing justice. The financial sector will have the opportunity to help more people realize their dreams and grow their households. This is however all predicated on being able to prevent speculation, which could otherwise result in empty houses and ghost towns.