Taipei rising: will new tax reforms signal a real estate comeback?

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Unchecked speculation, low supply and a tradition of homeownership have forced property prices in Taipei skywards

DIminishing returns

There’s a popular saying in Taiwan, which roughly translates as ‘whoever has land has money’.

That’s certainly true on the battlefield that is the Taipei housing market. House prices have skyrocketed in the capital, almost tripling in the last two decades. In proportion to income it is one of the most expensive places in the world to buy property.

In 2014, the Demographia International Housing Affordability Survey rated Taipei’s house-price-to-income ratio at 15.7. Even in New York, where the average unit price hovers around the USD1 million mark, the ratio is only at 6.1.

It’s easy to lay the blame – and many in Taiwan do – on Chinese capital inflows, but experts say that it’s a homegrown demographic that is behind the stratospheric price inclines.

Taishang is the term for Taiwanese businessmen who made their fortunes in China. They returned home to buy up property, and were further enabled by an inheritance tax cut from 50 percent down to just 10 percent that was enacted in 2009.

Seizing the opportunity to save huge sums on their tax bills, the taishang bought swathes of luxury property in Taipei, hiking up the vacancy rates and pushing prices skywards in the city.

While property prices continue to rise in the city, the taishang have had little impetus to sell these properties yet. This has led to “a vicious circle inflated into a speculative bubble,” according to Jakub Piasecki of The Diplomat.

The Taiwanese government sought to puncture the bubble painlessly with a luxury tax, which was introduced in 2011. Taxes of up to 15 percent were levied on properties sold within two years, but this failed to tackle the taisheng’s hoarded nest eggs. It didn’t help that the taxes were a drop in the Pacific for the wealthy.

Illegal units – 7,000 at the last count – abound in Taipei as new developments scramble for limited land among the empty apartments owned by the speculators.

The price hikes have been further spurred by a Taiwanese expectation of owning property rather than renting it. This societal trend means there has always been persistent demand for residential property, regardless of the high prices.

More: Why Taiwan’s real estate market may be facing a long-term slump

Domestic homebuyers have at least been aided by low mortgage rates and minimal down-payments on new developments – sometimes as low as TWD80,000 (USD2,500).

On the other side of the coin, foreign investors are giving Taipei the cold shoulder. Rental yields are as low as 1.57 percent, according to the Global Property Guide, and a recent ULI report gave Taipei the lowest ‘buy’ recommendation out of 21 APAC cities for residential rental investments.

When foreign investment was coming in, it was invariably coming from the Chinese mainland. A total of USD500 million in “qualified domestic institutional investor” permits are allowed from China into the Taiwan property market, although only USD257 million had been applied for by October 2015 since 2010, claims Tseng Ming-chung, chairman of the Financial Supervisory Commission.

And now that prices are so high and rents so low, “there is simply much more money to be made on the mainland market,” says Chang Chinoh, a professor of land economics and a board member at the Land Bank of Taiwan. The mature markets of Europe and the US are similarly more attractive.

And now even local sentiment has turned under the pressure of political change.

The new president-elect Tsai Ing-Wen, made addressing the housing crisis a key plank of her successful campaign.

Reducing speculation was also an aim of the previous government, who introduced an overhaul to the Capital Gains Tax (CGT) at the start of 2016.

Designed to “lower the profit of property investment and make buyers more conservative as they make a price offer,” according to Erin Ting of Savills, CGT now levies tax of up to 45 percent on property sold within six years of purchase, with only property below the TWD4 million (USD120,000) threshold escaping the hike.

It will now also be calculated on the actual transaction price of the property, as opposed to just the government assessed land value, which it was prior to January.

Although the move can be construed as another deterrent to investors, experts are confident that it a healthy development for the Taiwanese housing market.

“The structure of the tax measures themselves is to reduce speculation and quick turnover,” says Joseph Lin, managing director for CBRE Taiwan. “It will make the system and real estate market healthier as the transaction tax has previously been very low in Taiwan with minimal CGT.”

More: The most expensive construction sites in Asia

For now, however, the combination of the taxation overhaul and the political uncertainty has dulled the appetite for property purchasing and seen prospective buyers take a ‘wait-and-see’ approach.

Transaction volumes have frozen; Savills recorded a decline of 15 percent in the year to October 2015.

“The effects of the tax reform and the presidential election have pushed both buyers and sellers to the sidelines as they wait for prices to adjust,” says Jamie Chang, assistant manager for JLL Taiwan.

As the domestic market struggles, Taiwanese investors are turning their attentions to overseas property.

Cathay Life Insurance, Taiwan’s biggest life insurance company with over USD200billion in assets bought London’s Woolgate Exchange for USD435billion in July 2014. Other companies and wealthy individuals are known to be taking the plunge by buying up commercial and residential property in Europe and also in Asia’s emerging markets where property is relatively cheap and rental yields more generous.

Back in Taiwan, the sluggishness of the market is predicted to spur a modest price drop of around 5 to 10 percent by the end of 2016. The luxury market, as the supposed target of such measures, is likely to witness the most significant price declines.

Experts are however confident that the Taipei market will rebound in the mid-term once the dust has settled on the new government and the CGT.

“After the effects of the new taxation settles, market activities will resume due to persistent demand,” says JLL’s Chang.

The Taiwanese obsession with owning property in Taiwan, along with the low supply in Taipei, means that the current trough is likely to be a temporary one – no matter how unattractively high the prices get.

This article was originally published in Property Report magazine (issue no. 135).

is an editorial assistant at Property Report