Taoyuan Nights

A Taiwanese blog called Obblogatory kindly linked to my blog, and raised some views on housing in Taiwan. First of all – thanks for your kind words, Obblogatory.

Regarding the topic of housing, however, I thought I should respond.

Across the last 100 years or so, across every country in the world I’ve looked at, housing tends to have an average price, relative to basic salary, and over the long term, of around 3.5x – 4x. In other words, the average house – not just a crappy apartment – is some 3.5x the local average salary. If the local average salary is 30,000 wibbles, then an average family home will be around 110,000 wibbles.

Now it’s a little bit dangerous to start throwing around things like ‘100 years’ and ‘every country’ carelessly, so please, I encourage everyone to take a look into this claim for themself and assure themself to some extent that this is indeed the case.

The reasons for this ratio are perhaps that it represents a level of affordability that works well with a broad range of interest rates, and it works well given other demands on salary such as food and healthcare. Equally, this ratio allows rented housing to operate at a reasonable level of profitability, given the costs incurred in letting out property. So there are a number of quite sensible reasons why we should expect this relationship to exist.

Taiwan’s big problem is that house prices were at a peak of around 12x local average salaries in Taipei and variously 6-10x in other locations. So that would represent a drop of some 70-75% from peak values to bring Taiwan back into line with international and historical normality, in Taipei, and 50% elsewhere.

Meanwhile, we’ve hit a global credit crunch that has reduced the availability of credit; which in Taiwan is the primary means by which houses are purchased, as with most other countries. This means that even if prices were to drop by 50% tomorrow, the unwillingness of banks to lend would prevent people from buying anyway.

We also tend to see that housing markets that are falling tend not to stop until they have overshot the long term average (perhaps reaching 2.5-3x earnings before they start to rise again). This can be difficult to observe of course, since generally wages are rising at the same time house prices are falling, leading to the ratio being corrected more quickly than people realise. In other words, if everyone earns 30,000 wibbles/year on average, and average house prices are 300,000 wibbles, then we expect either money to devalue (so that wages rise to 100,000 wibbles/year) or houses to reduce in price (so that house prices go down to 90,000 wibbles/year).

But in practice we get both together, so housing corrections are usually over very quickly. Perhaps wages rise to 60,000 wibbles, and house prices fall to 180,000 wibbles.

So, in a crashing market, rising wages tend to ameliorate the damage somewhat. But currently in Taiwan we are seeing falling wages. The average person who changed jobs in the last few months took a pay cut of some 20-25%. The highest earners in Taiwan in the tech industry are being forced out on unpaid holidays 5 days every month. Consequently we have a new and hard-hitting downwards pressure on house prices; even as prices fall; wages are falling!

And all of this is happening without any trigger from rising interest rates, which usually represent another downwards pressure in a crash. This could yet be added to the Taiwanese maelstrom.

So in summary, it’s my belief that Taiwan is about to hit a very difficult time, especially in housing. We might be at the end of the beginning of the housing crash (10% falls per month is quite steep after all) but we are certainly far from the beginning of the end. Japan and Hong Kong are my models here, and they suggest another 50% (from Dec 2008) is still to come off house prices.

You’ll also see that marketing of houses will reduce as prices get lower; and consequently this factor too will lead to lower attained prices.

Regarding the topic of household size. Contrary to what you wrote, I believe that during a crash we tend to observe a reversal of the trend of diminishing household size. I will bet that if you look at household size figures for 2009 and 2010, you will see people moving back in with parents; taking in a lodger; or moving to a single house from two houses, to save money. You could argue this represents yet another downwards pressure on house prices. When money is hard, people share.

The idea of Taiwan’s population hitting 30 million is not at all realistic, I’m afraid. You can find the Taiwanese government projections for the population here.

Currently the population is around 23 million. The medium-level projection is for a peak of around 23.5 million 20 years hence, and falling from there. These things are sensitive to changes in health technologies and birth rate and so on. But basically, if you balance out all the trends, Taiwan’s population is going nowhere. That’s not my view, it’s the consensus government view.

Immigration won’t be an issue either – unless Taiwan surrenders to China, in which case Taiwan can expect a tibet/xinjiang/hongkong style mass immigration of Han Chinese from the mainland. But if that happens, I think population statistics will be the least of Taiwan’s problems.

Given that Taiwan is presently paying businesses a bonus if they lay off a foreigner rather than a local worker, I think other forms of immigration that might lead to an increased population can be safely ruled out for the moment, too.

So in summary:

- History says Taiwan has another 50% fall in house prices still to come.
- If unemployment gets worse, or if interest rates rise, or if wages drop, then the fall will be bigger.
- If the global credit markets stay locked up, the fall will likely be bigger.
- We have a number of trends, all of which are likely to push Taiwanese house prices lower.

Consequently I expect a further fall of 50% from December 2008 levels, over the next year or two. If wages were to rise sharply and unexpectedly, then it will lessen the fall in housing. I don’t think that will happen unless the Taiwanese government decides to print money like it did back in the 1940s – which lead to complete disaster.