Taiwan's housing market - overvalued, but rising
Lalaine C. Delmendo | August 08, 2019
Taiwan's Lutheran home price index increased 2.11% (1.54% inflation-adjusted) during the year to Q1 2019, the biggest y-o-y rise since Q4 2014, according to Sinyi Real Estate Planning and Research. Quarter-on-quarter, nationwide house prices rose by 0.74% (0.5% inflation-adjusted) in Q1 2019.
All the country's major cities saw house price rises during the year to Q1 2019.
- In Taipei, the capital, house prices rose by 1.5% (0.93% inflation-adjusted) during the year to Q1 2019, up from the previous year's 0.68% y-o-y increase.
- In Xinbei, house prices rose by 1.33% (0.76% inflation-adjusted) y-o-y in Q1 2019, its sixth straight quarter of annual growth.
- In Taoyuan, house prices rose by 3.47% (2.9% inflation-adjusted), its ninth consecutive quarter of y-o-y growth and the second biggest expansion since Q2 2014.
- In Hsinchu, house prices rose by 2.3% (1.73% inflation-adjusted), following y-o-y rises of 8.44% in Q4 2018, 4.61% in Q3, 2.18% in Q2 and 4.19% in Q1.
- In Taichung, house prices rose by 5.23% (4.64% inflation-adjusted), an improvement from the 3.77% growth recorded in Q1 2018.
- In Kaohsiung, house prices increased 5.42% (4.83% inflation-adjusted), the biggest expansion since Q2 2015.
In the first five months of 2019, the number of housing transactions in Taiwan's six major metropolitan cities rose by 7.6% y-o-y to 91,095 units. Over the same period, the number of residential construction licenses issued surged 23.3% to 58,936 from a year earlier.
The housing market is expected to strengthen during the remainder of the year, buoyed by the continued interest from property investors and homebuyers, according to local property experts
Yet Taiwan's slowing economic growth might adversely impact the housing market. The economy grew by 1.71% in Q1 2019 from a year earlier, down slightly from 1.8% growth in Q4 2018 and the lowest expansion since hitting 1.22% in Q2 2016, according to the Directorate General of Budget, Accounting and Statistics (DGBAS). Recently, DGBAS cut its forecast for Taiwan's 2019 economic growth to 2.19% from an earlier projection of a 2.27% growth, amidst rising uncertainty over global demand.
Taiwan’s unhappy property owners
Taipei now vies with Monaco for having the lowest yields in the world. With buying prices per square metre averaging a steller US$7,200 to US$9,200, depending on size, and rents still affordable (where else can you rent a US$1.8 million home for just US$2,200 per month?), Taipei is not a happy place for landlords.
The owner of an apartment in Taipei will be lucky to realize 2% yields, except on the very smallest apartments. Given that the Global Property Guide’s figures are for gross rental yields, i.e., do not make any allowance for vacant periods, for legal costs, administration costs, cleaning and repairs, rental taxes, property taxes, and other taxes, it is safe to say that landlords in Taiwan earn nothing on their apartments.
We believe apartments in Taipei are overvalued - and will fall in price. But we should warn readers that we can get it wrong!
Rental income tax is high in Taiwan
Rental Income: The gross income of nonresidents is taxable at 20% with no exemptions or deductions allowed.
Capital Gains: Capital gains realized by nonresidents are treated as regular income, and are taxed at the personal tax rate of 20%.
Inheritance: Estate duty is levied at 10%.
Residents: Residents are taxed on their income from Taiwanese sources at progressive rates, from 5% to 45%.
Buying costs are moderate in Taiwan
The total roundtrip cost of buying and selling a dwelling is around 10.26% - 13.3% of the property's value, including the real estate agent's 4% - 6% fee, which is shared by the buyer (1% -2%) and the seller (3% - 4%). To register the property requires three procedures, which can be completed in about five days.
Pro-tenant laws lead to avoidance
If the tenancy laws were properly followed, Taiwan could be regarded as pro-tenant.
Rent Control: There is rent-control, and tenants have security of tenure. However, most landlords catering to the low income segment do not follow the law.
However, those who cater to the expatriate and high income market have no choice but to follow the law. To avoid the legal disadvantages, most high-end apartments rent as serviced apartments.
Economic growth slowing; relations with China reached new lowTaiwan’s economy grew by 1.71% in Q1 2019 from a year earlier, down slightly from 1.8% growth in Q4 2018 and the lowest expansion since hitting 1.22% in Q2 2016, according to the Directorate General of Budget, Accounting and Statistics (DGBAS).
Recently, DGBAS slashed its forecast for Taiwan’s 2019 economic growth to 2.19% from an earlier projection of a 2.27% growth, amidst rising uncertainty over global demand.
Exports, which accounts for about 60% of the country’s GDP, are now expected to remain in the negative for the whole year, after the US raised tariffs on an additional US$20 billion of Chinese goods last May.
Taiwan, heavily dependent on exports, was seriously affected by the US economic recession in 2008. The economy bounced back in 2010 with spectacular growth of 10.6%, but since then growth has been modest. The Taiwanese economy grew by 2.6% last year, after annual growth rates of 3.1% in 2017, 1.5% in 2016, 0.8% in 2015, 4% in 2014, 2.2% in 2013, 2.1% in 2012, 3.8% in 2011, and 10.6% in 2010, according to the International Monetary Fund (IMF).
Nationwide inflation stood at 0.86% in June 2019, down from 1.4% a year earlier, according to the National Statistics. Inflation is expected at around 1.1% this year, at par from an average of 1.05% from 2010 to 2018.
Unemployment was 3.67% in May 2019, almost unchanged from a year earlier. Unemployment averaged 4.3% from 2000 to 2018.
In the January 2016 presidential elections, Tsai Ing-wen led the Democratic Progressive Party (DPP) to landslide victory and became Taiwan’s first female president.
One of Tsai’s key economic policies is to reduce Taiwan’s reliance on Mainland China, which accounts for around 40% of the island’s exports. Tsai plans to form closer ties with the ASEAN.
Mainland China is highly suspicious of Tsai, warning her against any attempt at a formal breakaway. Early in 2016, the Chinese government announced that it had cut off official contact with Taipei. In December 2016, Taiwan sent a blunt message to China by preparing its military forces and stepping up its training exercises to fend off Beijing’s threats.
Taiwan’s relations with China reached a new low after China decided to boycott the Olympic-style sporting event, 2017 Summer Universiade, which was held in Taipei in August 2017.
In August 2018, the Central American state of El Salvador severed ties with Taiwan and officially recognized Beijing, citing domestic economic concerns and international realities as motivating factors behind the move, not to mention the latter’s assurance of providing development assistance in the country. El Salvador was the fifth country to cut ties with Taiwan since Tsai came to office, following the Burkina Faso, Dominican Republic, Sao Tome and Principe, and Panama.
“China stealing our allies, pressuring our international space won’t shrink the distance across the strait and won’t allow for peaceful, friendly development of cross-strait relations,” said Taiwan’s foreign minister Joseph Wu.
Taiwan now has only 17 diplomatic allies left.
China’s campaign to isolate Taiwan extends to minute details. In the past months, Beijing has been sending warning to airlines to list “Taiwan, China”, rather than just “Taiwan”, on their websites. The move seems working after The Associated Press found that about 20 carriers, including Air Canada, British Airways, and Lufthansa, now refer to Taiwan as a part of China on their websites. In addition, China fined a Japanese clothing company recently for listing Taiwan as the “country of origin” on packaging.
In June 2018, the United States officially opened the American Institute in Taiwan (AIT), which serves as the US’ de facto embassy in Taipei, escalating further the tensions between Taiwan and Mainland China.
Relations between Mainland China and Taiwan thawed after President Ma of the Kuomintang Party (KMT) assumed office in May 2008. He vowed greater cooperation with Mainland China and denounced independence for Taiwan, a sharp contrast to his nationalist but corrupt predecessor, Chen Shui-bian. In November 2009, several memorandums of agreement between Taiwan and China on financial cooperation were signed. These gestures reassured investors and home buyers alike. In June 2010, an Economic Cooperation Framework Agreement (ECFA) was signed by Taiwan and China. President Ma also accepted the 1992 consensus, which played a crucial role in lowering tensions with China and boosting cross-strait economic ties.
Ma was reelected in the 2012 presidential elections. Cross-straits trade nearly doubled during Ma’s term, reaching US$198 billion in 2014. Tourism flourished, with nearly three million Chinese tourists a year.
In July 2019, the US announced of its intent to sell 108 M1A2T Abram tanks and Stinger missiles worth US$2.2 billion to Taiwan, despite China’s demand to cancel the said sale. The weapons deal to Taiwan is a vital aspect of a political deterrence strategy and a signal to China of US commitment to Taiwan and to a peaceful resolution of cross-strait differences. As an expression of outrage, China recently said that it would impose sanctions on US firms involved in the weapons sale, as it harmed China’s sovereignty and national security.