Taiwan is pushing home prices down through amazingly harsh taxes
Last Updated: October 15, 2015
Taiwan’s Lutheran home price index fell by 4.33% (-3.9% inflation-adjusted) in August 2015 from the same period last year, in sharp contrast with the annual rises of 3% in a year earlier, and 11.3% in August 2013, according to Sinyi Real Estate Planning and Research.
Most Taiwanese cities saw either falling house prices, or a sharp slowdown in house price rises during the year to end-Q2 2015:
- In Taipei, the capital, house prices fell by 6.64% (-5.98% inflation-adjusted), in contrast with y-o-y rises of 5.89% in Q2 2014, 11.51%in Q2 2013, and 6.74% in Q2 2012.
- In Xinbei, house prices fell by 1.37% (-0.67% inflation-adjusted), compared from annual increases of 7.75% in Q2 2014, 14.92% in Q2 2013, and 11.41% in Q2 2012.
- In Taoyuan, house prices dropped 2.35% (-1.65% inflation-adjusted), in contrast with annual increases of 6.28% in Q2 2014, 20.81% in Q2 2013, and 13.42% in Q2 2012.
- In Hsinchu, house prices rose by 2.01% (2.74% inflation-adjusted), the lowest annual increase since Q1 2009.
- In Taichung, house prices rose by a minimal 1.27% (1.98% inflation-adjusted), down from annual increases of 4.49% in Q2 2014, 18.29% in Q2 2013, and 11.68% in Q2 2012.
- In Kaohsiung, house prices rose by 9.2% (9.98% inflation-adjusted), from annual increases of 2.87% in Q2 2014, 26.34% in Q2 2013, and 16.27% in Q2 2012.
Demand continues to fall. The number of property transactions in Taipei stood at 2,419 units in September 2015, down by 3.3% from a year earlier and the lowest September level in 14 years, according to Yung Ching Realty Group. Property transactions in New Taipei plunged 32.8% y-o-y to 3,223 units, the lowest September level since 1999. Residential construction licenses fell by 15.1% to 72,904 houses in the first eight months of 2015 from the same period last year, according to the Ministry of Interior.
Residential property prices in Taiwan are likely to fall by 5%-10% per year over the next two years, according to Taiwan Ratings. In addition, property transactions and housing starts are expected to slow, mainly due to the property tax reform, according to Jones Lang LaSalle.
Taiwan’s economic growth is expected to slow to 1.56% this year, down from an earlier government projection of 3.28% growth and lower than the average annual GDP growth rate 4.5% from 2010 to 2014.
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. There is also 5% VAT on rentals.
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% for tax year 2015.
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.
Economy slowing; relations with China under threatThe Taiwanese government recently cut its GDP growth forecast to 1.56%, the lowest level since the global crisis. In Q2 2015, Taiwan's economy grew by a meagre 0.64%, the weakest growth in three years, amidst slowing demand from China, according to the Directorate General of Budget, Accounting and Statistics. GDP growth stood at 3.7% in 2014, up from 2.2% in 2013, 2.1% in 2012 and 3.8% in 2011, according to the International Monetary Fund (IMF).
Taiwan, heavily dependent on exports, was seriously affected by the US economic recession in 2008. The key interest rate was reduced from a five-year peak of 3.625% in August 2008 to the historic low of 1.25% in February 2009. Economic growth slowed sharply to 0.7% in 2008, in sharp contrast to the robust GDP growth of 5.6% in 2002 to 2007. The economy contracted by 1.6% in 2009.
The economy bounced back sharply in 2010, registering a spectacular growth of 10.6%. The country has seen modest growth since then.
Taiwan’s exports plunged by 14.8% in August 2015, its seventh straight month of falling exports, amidst weakening global demand for its technology products.
Taiwan is expected to see negative inflation this year, at -0.1%, from 1.2% in 2014, 0.8% in 2013, 1.9% in 2012, 1.4% in 2011, and 1% in 2010, according to the IMF.
The country’s overall unemployment rate is expected at 3.96% this year, unchanged from last year.
Relations between mainland China and Taiwan began to thaw 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 his inaugural address, Ma promised “no independence, no reunification and no war”. 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.
President Ma was reelected in the 2012 presidential elections.
Cross-straits trade has nearly doubled during President Ma’s term, reaching US$198 billion in 2014. Tourism has flourished, with nearly three million Chinese tourists a year.
However, a growing number of Taiwanese are now concerned that domestic industries might be overwhelmed by competition from Chinese companies and jobs might also be threatened. There were occasional street protests. In the local elections held last November 29, 2014, KMT lost by historic proportions, which reveals the extent of popular discontent with the ruling party. Ma recently resigned as KMT chairman.
Taiwan’s next general elections were scheduled for January 16, 2016. The KMT's image problem means that the independence-leaning Democratic Progressive Party (DPP) has a better chance of returning to power. If DPP’s Tsai Ing-wen is elected as president of Taiwan, a cross-strait crisis could ensue. In fact, Chinese leaders recently warned that tensions will rise again if the winner of Taiwan’s next presidential election fails to make a clear commitment to the notion that there is only one China.