Paper on Parade: Taiwan’s Flood of Household debt

Among 12 274 subjects, those with high‐level household debt exhibited 12% increased odds of hypertension and double odds of depressive symptoms compared to low‐level household debtors.1

Time again for my regularly irregular feature, Paper on Parade. This post we’ll be looking at why ordinary joes in Taiwan are screwed by the housing market, courtesy of Chen Yi-ling’s (U of Wyoming) paper “Housing Prices Never Fall”: The Development of Housing Finance in Taiwan.

Syaru Shirley Lin, the Taiwan expert and author of Taiwan’s China Dilemma (my review), scribed “Taiwan’s continued success requires economic diversification of products and markets” for Brookings last week. In that excellent review of Taiwan’s current situation, she observed:  

According to Taiwan’s Central Bank, household debt as a percentage of GDP has reached 86.7% in 2019, much higher than the global average.

Lin also notes, as many have, that the older generation is secure with savings, government welfare, and assets, while the younger generation has little and relies on family support for long periods. The consequences of this for society and for politics are profound. In her chapter in Taiwan’s Economic and Diplomatic Challenges and Opportunities Lin paints a grim picture of Taiwan’s “high income” economy, in which real wages have been negative, especially in Taiwan’s export industries, with gains only in certain services.

In this economy, as anyone who lives here knows, to buy a house without debt means socking away one’s income for at least 15 years. Consequently, everyone must take on mortgages, which have driven Taiwan’s household debt to over 80% of GDP every year since 2004, according to Lin.

Chen Yi-ling at the U of Wyoming in “Housing Prices Never Fall”: The Development of Housing Finance in Taiwan traced the origins of this system by which the savings of the Taiwan Miracle generation are sucked back into the banks. She writes:

Taiwan’s government started financial liberalization in the 1980s due to pressure stemming from the trade imbalance with the United States and domestic financial needs (Winn, 1991), which opened the door for financialization. Easier access to financing increased the capital available for the housing market and stimulated housing consumption, and hence has intensified the role of housing as a speculative tool in Taiwan. In order to prevent the housing bubble from bursting, and to avert potential resultant damage to the financial sector, the government continues to provide mortgage subsidies to sustain the housing market. For this reason, housing prices have had several dramatic increases but have not had counterbalancing drops of similar magnitude. Hence, “housing prices never fall” has become a common mantra in Taiwanese society. The impacts on housing are revealed in the so-called three “high” characteristics—a high rate of homeownership, a high vacancy rate, and high housing prices. These three contradictory features can co-exist because housing is constructed as a good tool for investment and storing value.

As I have noted several times before, vacancies are driven in part by the subsidies to developers, which mean that a developer need sell only half the units in a given project to break even, and by the high home ownership rates in Taiwan. After the Plaza Accords Taiwan’s currency, which had been fixed at 40 NT to the dollar, was permitted to rise. Foreign banks moved in and the economy began “financialized”. Capital flooded into the housing market. According to Chen, mortgages rose from $13.5 billion US in 1988 to $215 billion US in 2017. Home ownership is higher here than in most OECD countries.

Chen provides a selection of grim statistics from the battlefields of Taiwan’s housing market:

  • Since 2011, median mortgage payments have accounted for more than 30% of median household income in Taiwan.
  • In Taipei city the ratio of median housing prices to median income is 15-1.
  • 20% of Taiwan’s homeowners own more than one unit
  • In Taipei owners possess 1.67 units on average, whereas national average is just 1.48
  • The official statistics divide homeowners into business owners and natural persons. For business owners, 40.8% owned two + units (46.4% in Taipei). For natural persons, 11.7% own two+ units.
  • Weirdly, average rental yields in Taiwan are just 1.5%
  • There was no gov’t information on housing prices until… 2012.
Yanshui’s famous octagonal house.

Chen argues that after the economy became financialized in the 1990s, the developmentalist state that led the economic miracle shifted from supporting productive activities to driving the housing market. “In fact, wealth in Taiwan is increasingly reliant on capital gains from the housing market rather than real production,” she says, citing SC Hu. The government’s policy was promote private homeownership rather than provide housing as in other East Asian states (Taiwan does not sort easily into any policy category). It kept taxes low, meaning that wealth from housing investments accrues to individual investors. Housing is now a tax shelter, as I have extensively written on in the past.

After the financial liberalization at the end of the 1980s, speculative capital poured in to buy NT dollars. Between 1986 and 1992 housing prices tripled. This triggered the first housing movement, largely comprising middle class people priced out of the skyrocketing market, to which the government responded by — what else? — increasing financialization via loans for housing construction (yes, that’s right, loans to the construction-industrial state melange of organized crime and disorganized corporations) and mortgages for people without houses.

Gradually as Chen notes, the state’s intervention in the form of low-interest mortgage loans supported housing for the middle class while protecting investments in real estate. In 1991 and 1992, she narrates, no less than 16 private banks were formed, and it was loans for everybody. The informal market died away as cheap loans flooded the housing market.

The results were, inevitably, capital accumulating in the hands of a few players, with the public bought off by cheap loans and the health insurance system. “The privatization of banks enhanced the dominance of three financial holding companies led by the Wu, Ko and Tsai families in particular. Their gross output value rose from 28% of the total output value of financial holding companies in Taiwan in 2002 to 56% of the total output value in 2007 (Tao and Chang, 2008, p. 231),” she writes.

She also points out that the heavy concentration of large financial firms is intended to protect Taiwan’s financial industry. Because China blocks Taiwan in the World Bank and IMF, there is no back-up financial well to draw on in the case of a financial crisis. Taiwan has to go it alone. Yes, that’s right, the one China principle even affects housing prices and interest rates in Taiwan.

We are now living in the aftereffects of the third major surge in housing prices, which began in 2005. First, capital returned to Taiwan amid global economic uncertainty. Then, in 2008, under Ma, the inheritance tax was slashed from 50% to 10%, increasing capital available for families to accumulate. Housing, always seen as an investment that never goes down, became even more in demand.

The government’s preference, Chen describes, is to prop up housing prices. Whenever they threaten to fall, the government steps in immediately to lower taxes and provide additional financing. Prices, even with short dips, remain high. The result is what we have seen since 2010: the various housing bubbles around the nation, real estate prices rising across the island, the appearance of social housing movements backed by NGOs. The vast torrents of financial capital pouring into the housing market have compelled the government to sustain it. Otherwise, it would collapse, imperiling the nation’s financial industry. Indeed, the government manages this market the same way it handles all its other policies, as a series of desperate alchemical expedients designed to turn public assets into private gold.

1Song et al. (2020) Household debt, hypertension and depressive symptoms for older adults, Geriatric Psychiatry

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