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Wednesday, December 15, 2010

Bubble fears as Taipei property prices hit record

When 35-year-old Yu Chang-che made a record-breaking offer on an apartment on the fifth floor of The Palace, a gated community in downtown Taipei, he set off a wave of complaints across Taiwan.Yu, the son of a well-known property investor, agreed to pay 280 million Taiwan dollars (nine million US) for the 450-square-metre (4,800-square-foot) unit, a historic high that raised eyebrows around the island.

"Many people wouldn't be able to buy so much as the bathroom in such a luxury home even if they spent their entire life savings," said Lai Shyh-bao, a legislator of the ruling Kuomintang party.The deal ended up on the front pages of major newspapers and became a hot topic on the 24-hour news channels as fears mounted it would set off new cycles of speculation.

In the end, Yu backed out of the transaction.In the wake of the global financial crisis, Taiwan's property market has soared, sparking fears that prices will spiral out of the reach of the average buyer -- and generate a damaging property bubble.At the end of October, the average price of property in Taipei city was 4,614 US dollars per square metre, according to data from property agency Taiwan Realty.This is up 15 percent from a year earlier, and makes Taipei the fifth-most expensive Asian city, behind Hong Kong, Tokyo, Singapore and Seoul, and ahead of Shanghai and Beijing, according to the agency.

"No one expected an upturn such as this," said Chen Yu-cheng, a broker at National Realty, another Taipei-based property agency.Analysts say the rally has been spurred by low interest rates amid ample liquidity worldwide aimed at rescuing struggling economies.Adding fuel to the fire is a government decision to slash inheritance tax, prompting an inflow of idle money that had stayed abroad, said Chang Sheng-hung of Mega International Investment Services.Finally, the property market has been helped by a significant reduction in tension with Beijing after the China-friendly politician Ma Ying-jeou was elected president in 2008.

Tallies released by the government in August indicate that the house price-to-income ratio -- the ratio of the median market home price to the median annual household income -- hit 11.5, up from 9.9 at the end of 2008.In other words, even if an average Taiwan family spends nothing on food or clothes or anything else, it will still take more than a decade for them to be able to buy a home.

Skyrocketing housing prices have emerged as a key public complaint, and the central bank has raised interest rates twice while tightening credit for housing loans this year, but so far to little effect."The bubbles have been there for a while and are getting bigger and bigger," said Chang Chin-er, a specialist in land economics at National Chengchi University in Taipei.Unlike the academics, land developers say the present prices remain at reasonable levels, arguing that the risk of a sharp correction is low -- at least within the next year.

"If you take the price-to-income ratio into consideration, Taipei's realty prices still fall within reasonable levels," said Frank Chung, the chairman of Huaku Development Co.Chung remains bullish, citing the continued US attempts at quantitative easing measures which have been further driving up liquidity heading for emerging markets, including Taiwan.

Still, the private think-tank Taiwan Institute of Economic Research strikes a cautious note, saying short-term speculative trading, seen as one indicator of bubbles, has made up more than 20 percent of total transactions."The risk of bubbles bursting may be even more pronounced next year if the government takes no fresh measures to rein in prices," said Liu Pei-chen, a researcher at the think tank.

Also setting off alarm bells at the think tank is the fact that the total amount of the island's outstanding housing loans now account for more than 40 percent the island's gross domestic product, she said.Chengchi University's Chang estimated Taipei's property prices are already 43 percent higher than they should be, given average incomes and the current demand for rented homes."The bigger the bubbles, the greater damage they may wreak to the economy once they burst," he said.


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