Taoyuan Nights

One of the quirks of Taiwanese life is that people are very often prepared to do unusual jobs to pay their bills. Consider the Wobbly Sign Man. He stands on a corner in Guishan at busy times of the week, and wobbles an arrow above a sign, to try and get people to look at a new housing development. Very few people see his face, if he does his job correctly, because you’re too busy looking at a strange black and white arrow oscillating like a Spaniard on his wedding night.

I hope he’s paid well.

What on earth could possess a man to undertake such employment? The money behind the housing boom in Taiwan. Personally, I hope this guy is getting a decent hourly wage, because he is doing his job really well. You’d think he’d take a break every now and then, but no, he’s tireless - as long as he stands there, the arrow shall wobble - come hell or high water.

This leads me into my main topic for this post, housing and bubbles. Presently, like most of the world, Taiwan is suffering from a unsustainable housing boom. I know this despite the fact I know almost nothing about Taiwan’s house prices. Like almost every country in the world, Taiwan dropped its interest rates to very low levels a few years back and hasn’t been quick to put them back up. Tada, unsustainable housing boom, the same as in every other country that did it.

Low interest rates mean money is cheap to borrow. If money is ‘cheap’, then people will want more money in exchange for their stuff, i.e., you’ll get inflation and prices will go up. Some of the inflationary side effects of cheap lending have been held back temporarily by a group of factors in many countries; importing low-cost foreign workers (keep wages low); exporting manufacturing to cheap countries to keep costs low (mainland China and India being the main beneficiaries); and continually improving technology and production processes (Taiwan being famous in this regard!).

The simple fact, though, is that houses cannot be made in the PRC or India and shipped to Taiwan. And when money is cheap, demand goes through the roof and supply can’t keep up. Consequently, prices go up, up, up. In the short term, at least. Further, low interest rates over a long period of time eventually force people to look elsewhere besides floating/fixed interest bearing deposits or bonds, as a place for their long-term savings. In other words, low interest rates screw up your long-term retirement saving plans. This in turn fuels further excess demand for housing, as housing mutates rapidly into a mainstream investment option for the masses.

However, house purchases are almost always funded by borrowed money - and whenever interest rates eventually go up again, the cost of that borrowing can rapidly become unsustainable on a large debt. This leads to people defaulting on loans (and forced sales) and also people running for the doors before they are forced to sell (discretionary sales). Further, as the cost of borrowing (interest rates) goes up, housing becomes much less attractive as an investment option as its return (i.e. the rent you get paid as the landlord) remains roughly stagnant compared with the rate of growth in interest rates. Consequently, few new investors in housing will come along. And the economic instability surrounding this period spooks businesses, and puts a freeze on hiring - and that drops the employment rate and means no big payrises. That in turn discourages people from making any big new speculative investments.

So when interest rates go up, a number of pressures on house prices emerge and they all push the cost of housing back down again. You can see this in the US just now, and parts of the UK. You can see this in Japan as well. In fact, the shock of the initial housing collapse in Japan last decade was so severe, that even when money was being literally given away for free (0% interest rates), no one would ever touch housing again, and so house prices continued to decline for 10-15 years.

Given the danger of housing bubbles when they collapse, why on earth would any government allow this to happen - much less every government (UK, USA, Australia, Europe, Japan, Taiwan….)?

It turns out, housing bubbles are more or less a dream come true for most governments.

• Boosts taxes. If your government taxes the estate of a dead person (Inheritance Tax), then boosting the value of the estate boosts the inheritance tax. If you tax property transactions (the buying and selling of houses), tax income goes up during housing booms. If you tax houses each year based on their value, again, tax income rises. If you tax ’short-term capital gains’, then the speed of a housing boom usually ensures higher taxes too. A huge surge in building can lead to higher tax returns from that sector too.
• Boosts employment. “Let’s build some houses, lads!”. Employment makes voters happy; employment brings in more taxes.
• Makes voters happy. There are few things people love more, than to be told that their personal ‘pile of bricks on a piece of dirt’ is worth twice as much as it was last year, and that they are now a millionaire (on paper). Oddly, they will feel ‘rich’ as a result of this, even if they can’t actually move to another house without spending the same amount of money, and even if they are in fact still living in the same crappy pile of bricks they were living in 5 years ago.
  Don’t believe me? Look at the number of leading world politicans who were easily re-elected for a second term in the last 5 years, despite unpopularity on issues such as domestic security, international affairs and spending. UK, USA, Australia, I’m looking at you!
• Solves your pension problems / demographic timebomb. Generally, old people own houses. Young people do not. In order to get a house from someone else, you must pay. Housing bubbles ensure that the flow of money from young people to old people is very high. This can be used to solve the problem of a pension crisis, where the government cannot afford to look after all the old people in the country. Ever noticed how it’s always your grandparents that ask when you’ll be buying a house and settling down? It’s an old-person conspiracy, I assure you =). Unfortunately, this kind of intergenerational wealth transfer rains shit upon the lives of young people, and leaves them trapped in debt with no chance of a better life, and little ability to afford a family. But who (in government) cares? It saves the government from being seen to directly raise tax in order to hand out money to old people, if they can indirectly cause the same flow of funds from young to old.
• Renews dead housing areas. “Wow, it’s a swamp, but apparently it’s magically worth $20,000,000 dollars, simply because the area next to it is ‘worth’ $40,000,000 and isn’t a swamp. Let’s drop some bricks on it and sell some houses, quick!”.
• Easy to make it happen. Simply drop your base rate of interest at your central bank, and magically, you get a housing bubble with very little need to interfere politically or craft cunning laws to make it happen. Best of all, you can feign ignorance of the whole thing! Simply declare your central bank independent then in reality stack it with cronies to do your bidding. Why is it that all the world’s central banks seem to have their key decision makers chosen and frequently swapped around by politicans, I wonder. Independence? Hah.

It brings some problems however.

• Ruins the lives of naive young people If your first action as a young adult is to take on a mortgage that will take 50 years to repay, then you are unlikely to be living a particularly enjoyable life between the age of 25 and 75. There will be no ‘housing ladder’ to move up. With interest rates only likely to go up (or inflation staying low and therefore, limited wage increases), you will be living in the first house you buy for the rest of your life. Consider yourself warned.
• Drops your population. “Honey, do we get a 3 bedroom flat instead of 2 bedroom, or do we have a family?”. You think I’m joking? Ask any young couple you know if they’ve had to push back their plans for a family, or work hours that don’t allow time for a family, as a result of the miraculous ‘housing boom’.
• Causes economic catastrophe when people realise they’ve been tricked. Bubbles seldom burst slowly. Look at the UK housing crash of the last 80s, the initial phases of the Japanese crash of the early 90s, the stockmarket crash of 2001.

Summary: Housing bubbles are a great way for governments to create ‘good feelings’ amongst the public that can ensure re-election effectively. They make economies look great, by sacrificing the hopes and chances of young people on the alter of failed pension provision. The inter-generational transfer of wealth that occurs at the peak of a housing bubble destroys lives on a very long term basis.

Here’s a nice quote to end this post:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” - Ludwig von Mises, Human Action, A Treatise of Economics, Yale University Press, 1949