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

Taiwan’s, and in particular, Taipei’s housing prices have increased at rates which made Toronto and Vancouver’s price increases seem anemic. The government introduced a luxury tax of 15% a few years ago (sound familiar?). The luxury tax had unintended consequences on the Taipei real estate market and created distortions in housing prices. Here is an article that discusses what happened in Taiwan. Clearly, Canadian governments, as usual, have their head in the sand failing to look at the experiences of other countries.

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

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.

The metrics are a bit different in Taiwan because the rental market is not consistent with housing prices. Rentals are relatively cheap and plentiful. So with the inability of landlords to make a cash on cash profit, the pressure was on:

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.

The article referred to above comes to an optimistic conclusion that at some point housing prices will continue their upward climb when the new taxes levied in Taiwan settle in and the new government settles in as well. The reality may be different. Taiwanese banks offer homeowners “interest only” mortgages with the result that they never build up equity in their homes as they pay only interest on their mortgages. With the cost of housing, most Taiwanese cannot afford to pay down their mortgages and still live in Taipei. So the need for increasing prices is the only way to get bailed out.

From personal experience, I can tell you that Taiwanese millennials have the same dilemma as Canadians. Base on their incomes and potential incomes, they have little hope of ever buying a home in Taipei.  I would not be as bullish as the writers of this article. This will be particularly true if mainland China investment dries up. A lesson that Canadians will at some point in the future learn. By the way, a price drop of 5 to 10 percent is not modest for the homeowners who have failed to build up equity. For most, the only way to get a house in Taipei is to inherit it.

Here is what finally killed the boom, some say for now:

Beginning the effective date (January 1, 2016), and subject to certain exemptions, owners who are natural persons (“Individual Owners”) and sell their property within 1 year of purchase will be subject to a 45 percent capital gains tax. Individual Owners who sell their property after 1 year of purchase will be subject to a 35 percent tax. For Individual Owners resident in Taiwan, the tax rate falls to 20 percent if a property is sold between 2 and 10 years of ownership, and falls further to 15 percent if they hold their properties for more than 10 years.

Property Prices in Taipei, Taiwan (2016)
Price to Income Ratio: 16.55
Mortgage as Percentage of Income: 101.97%
Loan Affordability Index: 0.98
Price to Rent Ratio – City Centre: 73.08