Taoyuan Nights

The Taipei Times refers to housing troubles in the north of Taiwan…

Finally, it seems like we’re there. The number of house sales is continuing to collapse (minus 15% taipei, minus 30% taichung in just one month) at what should be one of the best times of year for sales in most cultures. In other words, bye-bye buyers.

Of course, this is not even remotely surprising to anyone paying attention to the crashes in America, Australia, the UK, various European countries (Spain, Ireland, Italy), New Zealand, … all of which have followed nearly identical courses in the preceding 12-18 months.

Banks stop lending. Potential buyers stop buying (no ability to borrow). Sellers flood the market as they realise ‘the train has left the platform’. Potential buyers definitely stop buying as they see what’s happening! A two-tier market forms; some people who ‘have to get this money or we’ve lost everything’ with unrealistically high prices and houses that never sell; and some people smart enough to realise that a 20-30% price cut is probably still better than what they’ll get in a year’s time.

International money markets have been messed up for almost 12 months now, so even if people do want to buy, they can’t get the money because the banks can’t get the money. The banks just don’t have any capital left to lend out of their own and there is no willingness from large scale international institutional funds to take on bundles of mortgages.

In 6 months, price drops should be really obvious indeed, as estate agents scream at sellers to drop their prices. According to the article I quoted, prices are already down 10% in one month in Taipei.

Remember, a 50% drop cancels out a 100% rise, so a few 10% monthly drops relative to the peak can quickly become more significant than they first seem. Besides, annualising a 10% monthly drop shows you how serious it is, if it continues for any length in time.

10% monthly drops would turn your 10 million NTD Taipei apartment into a 2.8 million NTD Taipei apartment after 12 months. That might seem too much, but looking at history in a few different countries, you’d reasonably expect a market starting on a HPER of 12 to end up around an HPER of 2.5 or 3 (which is around or slightly below the long term average house price). Again, that represents about an 75-80% drop in prices.

This is extremely unfortunate for my friends in Taiwan who have bought houses in the last two years against my protestations. However, there was plenty of time to get out, and the warning signs that this was not a sane market were very obvious, specifically the crazy average-houseprice-to-average-earnings ratio in Taipei. There is not really any excuse for failing to take a few weeks or months to teach yourself about finance thoroughly, before you undertake what is probably the single most important financial decision of your life.

What happens next, I expect, is that most of the country is trapped ‘where they are’ - unable to change house, or escape debts they have built up. Meanwhile, interest rates rise as the central bank tries to keep inflation under control… gradually, people give up trying to stay current with their mortgage… and lose their house.

The next two to five years will be interesting to observe as a matter of academic curiosity, but for many people, I expect they will be very painful to experience.

A side note: Normally it’s a bit strange to annualise high monthly drops, the way I did above to get large implied annualised drops.

If a large, diversified, well run international company can drop like that; if a house in a US state full of wealthy people can drop like that; then by god, a crappy little Taipei apartment can drop 70-80% too!