Here is my reply.

I’m not a pessimist. I’m an optimist! I’m looking forward to a world (including Taiwan) where people don’t obsess about their worth in terms of how a pile of bricks is valued; where a family can choose to have an extra room AND have a child; where people don’t need to trade their entire working life to own a small, 2-bedroom apartment in nowhere-ville.

In fact, dropping prices is great even for owners! It means you will be able to trade up to an even nicer house, if you like, more cheaply. The world would be a much nicer place if house prices were considerably lower. The only people that gain from high house prices are landowners, housebuilders, very old people (who downsize), banks, estate agents and the government (through taxation). Most people don’t fall into one of these categories.

Besides, housing is not a measure of wealth. A country’s wealth comes from its productive ability in terms of tools, art, ideas, … Housing on the other hand is generally just a (poorly) assembled collection of mud and dead trees. People would hardly go screaming with joy around the streets if food prices doubled, or if water charges tripled, or electricity bills quadrupled. So why should anyone be cheerful when some other basic, needed commodity goes up? It’s bad news for everyone except those who make that commodity or benefit from its trade!

For me, the pessimists are those who think that high house prices are good, when really they tie up the capital of a society in a completely unproductive way, and transfer wealth from young to old in an entirely unfair and disproportionate way.

Anyway, my view on what will happen to housing is not coloured by what I would *like* to happen to housing or what I think is best for society. Rather, it’s just based on what history shows us, and the ‘laws of finance’, as far as they seem to exist. And besides…

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.

To get a feel for his audience, he asks “How many people here believe in ghosts?”

About 90 students raise their hands.

“Well, that’s a good start. Out of those of you who believe in ghosts, do any of you think you’ve seen a ghost?”

About 40 students raise their hands.

“That’s really good. I’m really glad you take this seriously. Has anyone here ever talked to a ghost?”

About 15 students raise their hands.

“Has anyone here ever touched a ghost?”

3 students raise their hands.

“That’s fantastic. Now let me ask you one question further… Have any of you ever had sex with a ghost?”

Right at the back of the room, one guy raises his hand.

The professor takes off his glasses, and says, “All the years I’ve been giving this lecture, no one has ever claimed to have had sex with a ghost. You’ve got to come up here right now and tell us about your experience.”

The student begins to make his way up to the front of the class. When he reaches the front of the room, the professor asks, “So, tell us: what it’s like to have sex with a ghost?”

The student replies, “GHOST???? I thought you said GOAT!”

Meanwhile, in today’s news…

“National Chengchi University’s English Department yesterday defended its annual year-end production about man having a sexual affair with a goat as an appropriate choice and said they were puzzled why people would consider the play profane and foul.”

Michael Turton has just written an excellent short article about Taiwan’s economy. I should probably make some comments of my own. My main concerns at present are:

• Exports. Particularly, Taiwan’s DRAM manufacturers are being slaughtered by the Korean DRAM manufacturers, because the Won is cheap. Makes me wonder if Taiwan is going to crash the TWD to try and save its industries. I keep getting a feeling that every country in the world is simultaneously trying to say ‘we’re the worst’ and competing to offer the lowest returns right now, to try and make their exports cheap, so that employment stays up.

• Surge in unemployment - locals and foreigners alike. Local unemployment is now at a 5-year high and approximately 1 in every 20 people are out of work. This statistic ignores employees who’ve been put onto ‘unpaid leave’ for the time being, which is becoming quite a problem currently.

  Taiwan is also striding into first place for sacking foreign workers right now, as they make big steps towards addressing the ‘weiguoren problem’ that was commented upon in newspaper letters earlier this year. For example, these Philipino workers. Or the hundreds of thousands of very worried Indonesian workers. There is a phrase in English that foreign workers might use to describe some local employers: ‘fair weather friend‘.

  Check out this amazing quote from an article about a huge drop in charitable giving.

  ---

  “The results of recent surveys conducted by several online employment brokers suggest that 100,000 Taiwanese businesses are likely to lay off workers at the end of the year, and that 90 percent of salaried workers have suffered investment losses equal to six months’ pay or more.

  Meanwhile, 27 percent of workers have had their salaries cut, and 20 percent either are going to be or have been dismissed.”

  ---

  Thankfully, Taiwanese government employees have been unaffected by the downturn. :-|

  “In contrast to a faltering employment market in the private sector, workers in the public sector have not been affected at all. DGBAS figures show that civil servants enjoy an average monthly salary of NT$63,000, which is much higher than the NT$36,000 average in the private sector. While the general public is suffering from the economic downturn, civil servants do not have to worry about their jobs. “

• Bosses showing their evil side. If you look at the unemployment numbers, you’ll note that “those who quit because they were not satisfied increased 2,000″. Now, think about that. We’re going into a recession, people are losing their jobs, yet an extra 2000 people suddenly decide - in just 4 weeks - to quit in these scary economic conditions? It suggests to me that mistreatment of employees is rising sharply. This comes as no surprise to me.

• Curious policy decisions.

• Drop in salaries. What exactly is the point in a one-off $3600 ‘voter bribe’ handout supposedly to stimulate spending, when people are getting $20000/month chopped off their salary? Even the biggest, most profitable companies in Taiwan are making giant cutbacks, for example, TSMC, the world’s biggest semiconductor manufacturer:

  “The company said manufacturing staff would take five days unpaid leave per month, starting this month, with other departments taking one day a week unpaid leave from January.”

  “Industry sources told Reuters last week that TSMC and its cross-town rival UMC were preparing to cut costs by up to 20 percent. UMC had told employees they may soon be put on a four-day week, taking the fifth day as unpaid leave.”

• Giving up children. Quite remarkable statistic this one. As hard times bite, people are downsizing their families.

• Local banks. If HSBC, UBS, Citigroup, … are in trouble - then how in heck’s name can local banks pretend they aren’t affected by the dramatic downturn in Taiwanese industry? Maybe they think they can all pretend they weren’t involved in lending huge sums of money directly into Taiwan’s insane housing bubble. I expect painful consequences.

I think I’ll close with some amusing quotes.

“The Taiwanese economy has entered into a bottom during the third and fourth quarters,” - Chen Miao, director of TIER’s Economic Forecast Center.

“I am sure that the Taiwan economic miracle has not come to an end. We are merely in a transition period.”- Taiwanese President Ma.

This person seems to have misunderstood the nature of graffiti.

A smiley face over Taoyuan!

Those aren’t stars in your eyes…
“Stellarium” is a useful, free program. Here it shows Venus and Jupiter.

1. Economy
   
   “Hong said that the composite score for the business indicators stood at 12 last month — the same level as in September, signifying tough times ahead with recession forecast to hit the country’s major trade partners. “

   “Share prices plummeted 47.5 percent last month, compared with a 31.6 percent drop in September, as investors exit the market and took shelter in times and savings deposits.”

   
   
   Picture from tw.quote.com, showing TAIEX 2005-2008.

   Clearly, being invested in the Taiwanese stockmarket wasn’t such a great idea. The Taiwanese stockmarket index is dominated by just a handful of electronics/semiconductor companies, and is heavily biased towards exporters.

   This stockmarket downturn is going to make people feel poorer, which will make them spend less and invest less. Ironically, it’s now likely to be a better time to invest for the very long term. But people won’t do this of course… when it comes to investment, most people like to pay high prices for things, and then sell them at low prices. It’s quite remarkable to observe.

   “Hong and Wu expressed hope that the various government economic stimulus, including the consumer voucher plan, would ease the blow of the financial storm that is evolving into a global economic gloom. “

   The political blow, perhaps…

2. Property
   

   “The survey’s composite index of confidence in property prices dropped to a low of 56 points last quarter — even lower than the 90-point level recorded during the SARS outbreak in 2003 and the lowest since early 2002 when the survey started, Chang Chin-oh (張金鶚), professor of land economics at National Chengchi University, told a media briefing yesterday. “The worst is yet to come,” he said.”

   Indeed it is, Prof. Chang. :-)

   “With luxury houses in Taipei being cut by about a third in the past few months, Chang estimated that property prices in Taipei would fall further by 30 percent.”

   That would certainly take prices back towards long term averages… but personally, I think an overshoot might be entirely possible. And here’s my personal favourite:

   “The survey also found that the central bank’s aggressive interest rate cuts drew mixed reactions from potential home buyers, with 48.5 percent of respondents saying they wouldn’t purchase a property simply because of lower short-term interest rates, Chang said.”

   So… low interest rates won’t make people spend any more… handing out ‘forced shopping coupons’ won’t make people spend any more… large government purchases of shares hasn’t make the slightest difference to the stockmarket…

   I think it’s rather clear that the economic situation is completely out of the government’s control.

   Generally, I don’t think ‘debt and spending’ is a good cure for the problem of ‘debt and spending’. For example, the voter bribe shopping vouchers, as a cure for public sentiment, are rather like trying to sober someone up by hooking them up intravenously to a bottle of whisky.

   However, Prof. Chang doesn’t have it entirely right.

   ““Only price cuts by construction companies can help the market return to health,” Chang said.”

   The problem is not simply one of healthy pricing, but of healthy attitude. Many people were buying houses to get rich quick, not because they had a realistic business plan or a real need for the house. Over the last two years, I talked with many people who bought houses, and not one of them had any idea of historical interest rates in Taiwan or internationally. Not one of them planned for ‘what if no one rents your house for 3-4 years, and the market falls’. Not one of them had studied the longterm history of the Taiwanese economy, other Asian economies, or house prices elsewhere in the world. Not one of them was considering the possibility of losing their job and not finding another job.

   The solution is going to involve a lot of pain. The price drops required are going to drive banks and housebuilders completely out of business.

3. Freedom

   “The latest act of chutzpah was the promotion of several Taipei City police chiefs who were accused of using illegal tactics against protesters during the visit of Association for Relations Across the Taiwan Strait Chairman Chen Yunlin (陳雲林) earlier this month. “

4. Weather
   

   8′ C expected this weekend. Time to dig that heater out of the cupboard. Personally, I’m loving this frosty cold weather. The street outside is silent, when normally on Friday night it is buzzing with late night scooters. Bliss.

OK, I’m going to give you some quotes from this article, but in a different order, to show you how crazy their conclusion is.

Item 1: Is this coupon going to stimulate new spending?

“Asked whether or not they believe the plan will encourage the public to spend more, 57.9 percent replied that they will use the vouchers to buy daily necessities, ahead of 36.6 percent who said they plan to purchase extra items with the vouchers. Around 5.6 percent revealed that they will try to exchange them for cash.”

So, the majority of people (2 to 1) intend to convert this to cash savings by either continuing to purchase normally but substituting the coupons, or by trying to exchange them for cash directly. In other words, this ’stimulus’ (voter bribe) has already failed.

Item 2: Is the coupon likely to be ‘effective’? (Dictionary: “Producing a strong impression or response; striking; having the desired effect”)

OK…

So, let’s add up the parts of this poll that sound ‘effective!’ and the parts that sound ‘not effective!’.

I get ‘19.9% effective, 80.1% not effective’. The China Post gets:

…. I see.

Earth-base to China-Post-base: has the moon landing been successful?

• Firstly: This is not an ‘economic stimulus’ - it is a voter bribe. If it were an economic stimulus it would be handed out to all consumers. This taxpayer money is being redistributed only to voting families. Why do you think that is?

  Furthermore, do you think the government would be encouraging you to “buy gold” with it, if this was about saving small businesses or saving the economy?

  “Chen Tain-jy, chairman of Council of Economic Planning and Development (CEPD) told the press… ‘Of course, you can even buy gold as an investment.’”

  That quote is taken from the article “Anything can be bought with vouchers“. Though perhaps a better title would be ‘Anyone can be bought with vouchers’.

• Secondly: This is a voter distraction. With free money filling up the columns, journalists have less room to draw attention to the government’s recent amazingly low standing in the opinion polls, breaking of election promises, protests against police actions, imprisonment of opposition politicians, and kowtowing to Taiwan’s big friendly neighbour.

• Thirdly: These coupons are not a gift from the government. You think the politicians are dipping into their own wallets? This ‘gift’ is your own money! The government is going to take $4200 from you in tax over the next few years, waste $300 on administration and re-printing costs, waste $300 on interest costs, and give you $3600 back today.

• Fourthly: This is not going to save the economy. For goodness sake, it’s $3600. What will it buy? A single bottle of whiskey to drown your housing sorrows? 1/4 of a small digital camera?

  The average income is, (from GDP/PPP), around 900,000 NTD per year. Divide 3600/900000, and you get 0.004 of your annual income. Wow. 0.004 of one year’s income. And supposedly, this kind of huge spending is really going to avert disaster for small businesses… That’s how big a difference this is going to make. And don’t forget, that ‘0.004′ (+ another 0.001) will be taken back off you again in the next few years.

• Fifthly: If I re-frame this ‘gift’, perhaps you can see better what it really is.

  Effectively, you are being forced to take out a personal loan from the bank, whether you want it or not. Laws are being passed to force you to spend this personal loan, so that it must be spent on useless junk during the month of January. If you don’t spend all the loan, your money will be confiscated! And you can only spend it at places that are registered as taxpaying businesses, increasing the government tax income that month.

  Additionally, a new law will mean you are going to be forced to pay the government a small charge as a thankyou for imposing these new laws and forced borrowings on you, perhaps $600 or some similar fraction of the money borrowed, in administrative costs, printing costs, interest etc. Finally, another law will force you to repay the bank loan over the next few years, along with all the other crippling debt that is weighing you down just now.

  If the government tried to introduce such new laws as described this way, forcing people to take out unwanted debt and spend it on junk, confiscating people’s money if they didn’t go out and spend it where and when the government chooses, there would be riots in the streets! But this is what they are actually doing, and people are delighted! What the heck? What’s wrong with people?

  As I begin to see Taiwanese people talking about what they will spend the money on, I ask myself: Doesn’t anyone here realise who’s really paying for this ‘gift’? Don’t they realise the government is passing laws to force them to spend money they don’t have, on rubbish they don’t need - and that it will be forcing them to pay that money back with interest in the next year or two to come? And that the whole ‘gifting’ is simply marketing - a public relations attempt to gain favour with voters?
  

For what it’s worth. Taiwan is not the only country playing these silly games. Look at the USA, and George Bush’s pre-election rebate ’stimulus’ bonanza. Look at Britain, and the ‘poor elderly (voting) person’ handout we see in every single general election…

Just one problem. It’s completely daft, and it doesn’t work.

As I understand it, Keynes’ idea of monetary stimulus involved government spending on projects in situations where consumers had stopped spending, in essence, becoming a forced spender of last resort. Handing out extra money to consumers, when they have started saving and paying down debt, is only going to make them save more or pay down debt more. A meaningless transfer from the public debt to private debt balance sheets, that has no short-term effect, and will be reversed years down the line, for no net gain overall.

Aha! But wait. There is a cunning plan. They’re going to give out ’spending coupons’ that you can’t save, so you’ll have to spend them.

The problem is that after about ten second’s thought, people will just substitute these coupons for ordinary money in their normal spending. Then, they will save or pay down debts with the money they saved.

There’s another cunning plan. Why don’t we give out ‘50% discount’ coupons - that way people HAVE to spend some money to get the government handout? Again, a moment’s thought makes it obvious that people will just use up the coupon in place of everyday spending, over twice as long a period. When it comes to adding unnecessary flourishes to a bad idea, you can always rely on academics and public officials. I am sure this weekend will be busy, as people work hard to re-arrange the deckchairs on the Titanic.

Don’t get me wrong. I’m sure a few people will get in the mood and go and pointlessly buy crap - after all, they’ve been doing it for the last 5 years with great enthusiasm, using borrowed money. But where is this money coming from? Ultimately, it’s coming from taxation, increased debt (which must ultimately be repaid through taxation) or from inflation (which is a form of taxation). So guess who’s paying for this mystery bonus? Either ‘future you’, or your children. And what could be better than stealing from the pockets of unborn generations? Isn’t that how society improves?

So, here’s my question. How does pointlessly buying crap fix a problem of overindebtedness, which is at the heart of the current difficulties? How does it fix the problem of overvalued assets (houses, particularly) which drove that excessive debt? How does it fix the problem of an export-driven economy when no-one is importing Taiwan’s stuff?

The answer is, it doesn’t solve the problem, or even come close. Actually, it makes it much worse. It pushes up public debt and price inflation at a time when people have not much money anyway. This drives up the short-term costs of debt, and increases future taxation.

Besides, Japan tried this years ago as a solution to recession in 1998 and surprise surprise, it didn’t work there either - even during the dotcom boom worldwide, Japan remained firmly stuck in recession as it handed out pointless spending coupons, while public debt ballooned. And did I mention that the JPY devalued completely, to record lows, over the decade that followed?

But, I guess it makes people feel good to ‘get money from the government’. Even though really, it’s just deferred taxation, and even though really, it does nothing but piss money up the wall, wasting the government’s ability to actually solve the problem later.

I mean think about it for a moment. The problem is that people have taken on something like 8 M NTD of debt, to buy houses that are worth perhaps 3-4 M NTD on a good day. We’re talking millions of dollars of unsustainable debt. And the government’s solution? Hand out 10,000 NTD to solve a 4,000,000 NTD shortfall per household? It’s like shouting into a hurricane.

Oh, and you know what annoys me most of all? This!

“At least one banker said the government should consider issuing a “tax reduction/rebate card” to all citizens if the Cabinet wants to see an immediate effect to encourage spending.”

So who will probably get these coupons? Voters, since this is a idiotic voter bribe as much as it is an idiotic effort to stimulate spending. But who will pay for these coupons? Taxpayers.

If, like me, you are not a Taiwanese citizen, I want you to think about the distinction between voter and taxpayer. It implies a forced transfer of cash from non-Taiwanese resident’s wallets to Taiwanese resident’s wallets. But I guess weiguoren probably deserve it because of their weiguo-ness and its apparently horrid effect on the Taiwanese economy.

In unrelated news. While ’supporting the price of shares’, the Taiwanese government has been busy buying shares at prices higher than their current level, as the market dropped. So… you, Joe Public, are now sitting on a gigantic stockmarket loss, thanks to the government. Gong xi!

“The latest statistics from the Ministry of the Interior showed that the number of property transfers declined by 35 percent to 26,527 in August from 40,839 in May when President Ma Ying-jeou (馬英九) took office. Sales in Kaohsiung City, Taipei City and Taichung City in August saw some of the biggest drops of 45.9 percent, 42.7 percent and 41.4 percent respectively since May.”

but here’s the amazing bit - Taiwanese businessmen are EXPANDING their investment into this contracting market. Unbelievable.

“But at the same time, the sector continued to expand by opening a total of 4,057 outlets in August, up 5.1 percent from 3,861 stores in May. Despite a worsening market, such expansion has shown no signs of slowing down as the nation’s total number of realtor outlets continued to climb to 4,139 this month, Evertrust Rehouse said.”

Apparently… “the sector is appalled to find the unexpected acceleration of such a slowdown, the likes of which hasn’t been seen since the earthquake of Sept. 21, 1999.”

So much for the widely held idea that the north and south of Taiwan are separate property markets…

“The real-estate market is becoming a buyers’ market, with nearly 70 percent of home buyers expecting to see falling property prices over the next year” - and that’s from a real estate agency!

“We believe property owners may face a 10 percent to 20 percent downward correction in their selling prices in order to close deals” - in other words, take the ‘official price drop reported’ and add 10-20% to reach the real number!

They add that ‘people have apparently been over-optimistic about Ma’s policies’. Really? Are you sure? Are you trying to tell me that there aren’t endless hordes of mainland Chinese businessman trying desperately to buy up flats in Linkou and Banciao?

Also: the Japanese market dropped 24% last night in overnight trading. Japan’s NIKKEI is now substantially cheaper than it was 25 years ago. In other words, if you bought 25 years ago, and held on to those shares your whole working life, you have lost money in aggregate, apart from dividends. Crikey.

The US isn’t looking too cheery either! DJIA at 8284 as I write. In January 2004, it was over 10000! I drew a graph on Yahoo, but the fall is so sharp, you can’t even see it at the right hand side. Basically, we are ‘back to 1998′. The graph below will update over time, automatically.

Hurray for America’s ‘glorious decade’…

For what it’s worth - I’m buying the market indices like mad currently, with every penny I have!

But I guess it wasn’t those ‘evil’ shorters that were causing the problem, was it? Of course… now, without shorters, we have no forced buyers in the market to flatten out the drops and start off recovery rallies.

And as for reintroducing low interest rates… well, what do you think it was that got the world economy into this problem in the first place?

So… what happens next, now that Taiwan has thrown away all this public money on busted attempts to prop the market up artificially?

More here at the China Post.

Fortunately I found that someone at the FT had already done it for me :-)

Suffice to say it’s been the most interesting two weeks in finance, of my whole life.

We’ve lost the world’s biggest insurer, and basically all the world’s biggest investment banks are dead or eaten by competitors. Most of this happened in just 10 days.

In the UK, we had about 8 big banks of varying sizes, so far 2 are dead (NRK/BB), 2 have been forced into takeovers (AL, HBOS). That just leaves LLOY, BARC, RBS, and HSBC. It’s exciting stuff.

Meanwhile in the USA, idiot citizens are phoning in to their representatives, trying to stop politicians passing a $700bn financial stability package. This is tremendously short-sighted. What do you think will happen if the banks become paralysed or bankrupt? Hundreds of thousands of businesses will be screwed. Hundreds of millions of individuals will potentially be screwed as the housing market begins a new and steeper nosedive, as their pension funds collapse, and as jobs disappear. John Mauldin has it right - pinch your nose and do the deal, because it’s the least bad of many bad options right now.

Meanwhile, Taiwan has tried to keep it’s housing market and stockmarket afloat by making money cheaper to borrow again, i.e. dropping interest rates. But this is foolish - the banks are paralysed by not knowing what losses they’ve taken and what losses their counterparties are taking. So, it doesn’t matter how low you put interest rates, the banks simply won’t lend. This is a liquidity crunch now, far more than an affordability crunch (though the housing market here is pretty bad in that regard too!)

Check out the Taipei Times. Wow, the media is catching up to the fact that houses are absurdly expensive in Taiwan, particularly Taipei, and it only took them two years to realise that.

““Taiwan’s housing prices are still overpriced,” Chiang Li-wen, manager of Taiwan Cooperative Bank’s (合作金庫銀行) personal banking unit, said by telephone.”

“Taiwan’s top five banks, including Taiwan Cooperative Bank, issued a total of NT$31.97 billion (US$1 billion) in new mortgage loans last month, the lowest since NT$21.19 billion in loans made in February, the central bank said in a statement this week.”

Here is what happened in Japan 18 years ago when the banks realised they had huge losses on their books (just like Taiwan), at a time of ridiculously high house prices (just like Taiwan), and couldn’t lend any more (just like Taiwan). Notice the interest rate graph - dropping interest rates doesn’t save you in a liquidity crunch.

House price declines in Japan, last 18 years. From this article.

Interest rates in Japan, last 18 years. From this article.

Heading straight for Taichung/Hsinchu.
This picture mirrored from Taiwan CWB website.

According to the CWB, this one has a maximum sustained windstrength of 53m/s currently and gust strength of 63m/s. That basically puts it into the ‘worst type of Typhoon’ category in the Japanese system (grade 5), and the ‘pretty darned bad’ category (Grade 3) in the International system.

So I think we can call it ‘a biggy’.

1. Taiwan has at least 1 million houses that are sitting empty presently.

2. Taiwanese house prices rose 50% in the last few years, while wages rose 2% (I don’t recall the timeframe mentioned in the article - it doesn’t really matter with figures like these).

Now unless the population jumps 3-4 million in the next few months, I can see that 50% rise turning into a corresponding 33% fall. However, since correcting markets tend to overshoot… and since the market started out pretty expensive… we should expect a bigger drop.

Note: RBS and HSBA are the UK’s two biggest banks.
RBS is up 44.2% after the first hour of trading.

Also, a quick comment about Taiwan. The US is reporting some $80 billion NTD of losses for Taiwanese investors and banks. Taiwanese newspapers this week only mentioned about $2-3 billion NTD when reporting on companies that have been hit. If you are reading the Taiwanese press and thinking ‘it’s probably nothing’, you may get badly burned. If you think you are OK because your bank hasn’t been mentioned yet - consider the possibility it is because they are still trying to add up their losses. “No news is not good news” when it comes to admitting losses, unfortunately.

Addendum: check out this beauty of a graph!

Actions, however, speak louder than words.

Action 1: They are pouring taxpayer money into the stockmarket to stop it sinking so fast.
Action 2: They are handing out free/cheap money to the banks to keep them alive (top of article - 3.6 billion US dollars handed out in cheap money on Tuesday alone).
Action 3: They are reducing Taiwanese bank reserve deposit requirements (if the banks have spare money and are not at risk from the USA, why is this needed???)
Action 4: They are telling you not to panic. As they talk to the public following an emergency meeting. Think about it.

If you keep all your money in one place just now, you are MAD. Actually that’s true at any time, but especially true just now.

Check out this list of Taiwanese banks who took giant losses just from the failure of a single US bank.

If you want to see something really amazing, though, look at this. The line represents how ‘risky’ the banks see the world. (It’s the inter-bank lending rate, LIBOR, on which US home loan payments are based).

113 ETF funds collapsed.

The Russian stockmarket is down 17% and trading was halted.

Markets all across Asia were down 5-7% even from the start.

The Shanghai stockmarket is now down 66% since October last year.

HBOS (biggest home loans bank in the UK) dropped by 40% at one point. Huge UK and US banks have been downgraded to near-junk status or have collapsed in the last two days - or been forced into buyouts/mergers. Washington mutual, bradford and bingely, HBOS…

In the UK, all the online stockbrokers stopped working; lots of internet banking accounts stopped working ( I think it is because people are panicking and trying to withdraw money).

The Dow Jones index dropped 500 points; Standards and poor (S&P) had it’s biggest drop since 1989, even worse than 9/11!

The FTSE just closed at a 3 year low.

If you know what PER is, consider the UK’s biggest home loan lender (2/5 of the whole country) is on a PER of 1.3 just now, a fraction of their book value. Most of the other big banks are down an amazing amount.

International banks almost completely stopped lending or trusting each other all day. LIBOR rates had the highest jump ever in history I believe.

Prices on companies worth 10’s of billions of dollars were jumping and dropping by 10%, 20% easily on markets all over the world.

Oil dropped to under $90/barrel. Everyone was going crazy each time it went UP by ONE dollar in a day. Now it drops 5 dollars DOWN in just hours, and the news ignores it! You can hardly find it in the media!

Even the friends I have who are professional traders for large banks had no idea what would be happening next.

It’s so exciting!

Tomorrow might see the world’s biggest bankruptcy ever if AIG cannot persuade Warren Buffett (the world’s richest man) to hand them lots of cash. Apparently Lehman Brothers also tried the ‘oh, please, go on!’ line with Warren and he politely declined.

These are amazing times! If you are interested in finance, now is the time to learn about it! We have front row seats to enjoy a wonderful performance!

What makes me laugh most, though, is this: All of these huge 10%-40% drops in multi-billion pound companies - and indeed - 20% drops in ENTIRE ECONOMIES - were taking place in MINUTES! And yet people tell me their houses can never go down in value; and they laugh when I talk of big drops occurring within a year to house prices.

As though their houses are somehow more diversified and better value than a large bank with sources of income from many businesses, all over the world. As though their little pile of bricks and mud is ‘better’ than an entire G10 country. Insane.

Lehman Brothers seems to have collapsed as a result of its exposure to the mortgage backed securities market (which has ‘imploded’ over the last 12-18 months).

$35 million is not much compared to some of the Japanese and US banks, of course, who are potentially out of pocket by billions of dollars in bank loans and bonds! Ouch!

In other news, Taipei county house prices are down 15%; some Taiwanese commentators already expect another 20-30% to come off the price. Michael Turton has some amazing coverage of the economy currently.

My Taiwanese friends often find it very strange that I go outside to enjoy typhoon weather, wearing little more than jeans and a T-shirt. They have this impression that typhoons are very deadly and very scary.

I find this quite interesting. The typical typhoon I’ve seen since arriving in Taiwan is certainly far more pleasant than the kind of weather I would go outside to play in, as a child in the UK. Gusts of wind? No problem! Warm, comfortable rain? Excellent!

Compared with bitter, icy blizzards; or fierce, icy cold rain that leaves you frozen to the bone within a minute, it has seemed rather pleasant to walk around in a Taiwanese typhoon - providing you keep away from the scooter drivers who seem intent on falling off their bikes.

I find it strange in some ways when my Taiwanese friends become shocked that someone could enjoy a typhoon. They are even more shocked to learn that I find earthquakes quite exciting, as do most of my western friends. They often comment ‘but don’t you know that typhoons/earthquakes kill lots of people???’

Of course I know that. So what? The fact that people are killed by something does not necessarily make all experiences of it unenjoyable. Wouldn’t they have fun playing in snow, if they travelled Northwards to Japan, China, Europe, or Canada?

Yet snow is far, far more deadly than a warm, pleasant, 1-day typhoon. Typically in Taiwan, perhaps 0-100 people are killed or injured by a typhoon. Sometimes, these people are doing silly things, such as walking around by the sea front, driving scooters in strong winds, or getting drunk in the midst of bad weather.

Compare this with the UK, where the snow and cold weather kills 25,000 old people over the winter (December-March) - every single year! (Reference).

Or how about The United States? There, more people are killed by snow and frosty weather than by leukemia, murder and liver disease added together! Snowy, frosty weather kills around 1% of all Americans every year.

So this is why I find it so surprising that local people are almost offended that someone could enjoy their bad weather or geological events ‘when they kill people’.

Don’t they have fun with alcohol, despite it being involved in the deaths of 100,000 Americans every year? (never mind European, Russian, and mainland Chinese deaths…)

Wouldn’t they go on a ski-ing holiday, or have fun building their first snowman, despite knowing that the same weather is killing so many hundreds of thousands of people every year worldwide?

In any event, this evening’s typhoon turned out to be a bit of a disappointment. The downpour was about as fierce as spending a few minutes standing under a warm bathroom shower, with a pocket fan blowing warm air in your face. My socks aren’t even wet :-(

Meanwhile in other news, the government is going to combat inflation in house prices by … handing out free money every month to young couples to pay their rent or interest payments. Think about that for a moment… fighting inflation by handing out armfuls of money. Rather like trying to put out a fire by dousing it with petrol.

A more sensible way to make housing a realistic proposition for young people is to allow the market to correct naturally. After all, when houses get to 30% of what they are just now, young people won’t have many problems at all…

Ending on a cheery note: inflation is now rising faster than my salary, and the government is using the tax system to hand out giant armfuls of my money to other young people simply because they are married. Brilliant!

Here is what happened in Tokyo and Hong Kong when their property prices zoomed in the way that Taipei’s have. I believe that in ‘house-price-relative-to-earnings’ terms, Taipei has recently exceeded the heights of these graphs.

So, dear reader, I show you a possible - indeed, likely - future.

Click on the pictures to view them fullsize. These pictures are mirrored from reinet’s site.

If you look at the high point on those graphs… well, that’s where I think we are now. And if you look at the low point…. well, that’s where I think we shall swiftly go: 70-80% falls in property prices, and most of it too fast for anyone to hope to escape.

“Taiwan’s housing prices will rise 5-10% annually through 2010 at least, according to construction company and real estate brokerage executives speaking at a “real estate summit meeting” sponsored by the Taiwanese real estate magazine Zhu Zhan in early November. Some even declared this rate of growth would be sustained through the next ten years.”

” Others noted that the Olympics in Beijing in 2008 would not only boost China’s economy, but the economies of other countries in the region as well, and that Taiwan’s real estate market would be among those benefiting.”

Now, let’s take a look at today’s media, too. Bear in mind these journalists can’t be bothered to do their own research, so they’re simply serving up numbers presented to them by estate agents - whose interests are served best if it seems house prices are rocketing up!

With that in mind… take a look here at the China Post (Aug 1, 2008).

First of all, it again mentions the 10% July price drop in Taipei; and 15% drop in transactions.

Secondly, more information about the rest of the island. Taichung sees a drop of 5% in one month, in July alone. Closed deals were down by 30%. 5% a month annualises to… a 46% drop this year, before taking into account inflation… Kaohsiung had flat prices and a slight raise in transactions, but there’s no indication if this is just a normal seasonal ’summer rise’, or a seasonally adjusted figure.

I’d be interested to see if the other figures were seasonally adjusted - if they aren’t, the drop in Taipei and Taichung may be even more steep than the figures suggest!

Apparently there is an additional Autumn pressure on Taiwanese houses that I didn’t know about - Ghost Month! Quoting the China post, “Furthermore, as the Ghost Month has arrived, more sellers are expected to lower prices to attract buyers. In the Chinese culture, Ghost Month is the month of July on the Lunar Calendar, which this year lasts from Aug. 1 to Aug. 30. Most people are hesitant to buy houses during this period.”

Very interesting stuff - but the thing that stands out the most to me, is this quote from an estate agent who is talking about why people are selling, again from the China post article (my own emphasis added):

“most sellers lowered their prices in the hope of getting rid of their property as soon as possible, due to the mounting mortgage pressure“

Mounting mortgage pressure? With interest rates still near historic lows?

How on earth will these people cope if mortgage rates reach levels such as 15-25%, as they have in developed countries across the world in the past?

On the one hand we have the risk of even more price inflation if interest rates stay low and the currency gets weak. On the other, we have this ‘mounting mortgage pressure’ showing up at rates as low as 3%! Something tells me that Taiwan is not in for a good time in the next few years.

p.s. Other news just in. Housing transactions in Taipei are now down by 60% in just 3 months… going into the summer! 60% down in 3 months…blimey!

(Apologies, Scott… it was too tempting)

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!

She had a great time - all my friends were really nice to her, and helped me to show her some cool places. I saw a few new places myself, too..

Mum, Leila, Ethan, and their children, shopping in a giant mall in Zhongli.

Exploring Taoyuan city centre

Tasting shui jiao (dumplings) for the first time, near Taipei Main Station.

Taipei City Hall area.

Enjoying the view from Taipei 101.

Looking out across Taoyuan city.

Exploring ceramics at Inge with Sean, Kyle and Leila.

The main Taoyuan city temple.

Visiting the Grand Hotel, Taipei.

Enjoying the decor, before lunch.

Travelling to Hualian County.

Discovering that in one Taiwanese hotel, only midgets can use the facilities (look carefully).

Reaching Toroko Gorge, Hualien.

Can you see mum on the bottom right?

Walking through the corridors of the Toroko.
This part of the road is said to be as ‘twisty as a Chinese dragon’.

Mum with Davie (our friendly host in Hualien) and his daughter Tina.

Stopping for a break at a lake near Hualien City.

Late night shopping in Hualien City with Davie, his son and a friend.

Exploring the beach.

First view of the Pacific Ocean

Myself, mum and Tina near “Cow Mountain”.

Exploring a temple on the East coast.

Back to Taipei. Looking from the Chinese Culture University (YangMingShan).

What’s that little building over there on the left?

Exploring the sulphuric geysers of YangMingShan.

Leila and Mum at an organic farm in YangMingShan.

Lots of wildlife…

Strange buildings in the mist…

Say Cheese…(Kyle, Sean, Leila, Mum and myself).

Kyle treating everyone to a healthy organic meal.

Picking Canna Lilies at YangMingShan.

Underground shopping at Taipei City Mall.

Visiting the Maokong Gondola, Taipei.

The idea that in Taiwan, I should avoid seeking ‘friends for the sake of friendship’, is one that I’m not very comfortable with. I don’t see my friends as tools I can use to achieve tasks. Therefore, it seems there may be some cultural lines that I am unwilling to cross in my engagement with Taiwanese society.

After writing my previous post, I received some interesting replies, particularly those from Cary Allen, and Kerim Friedman. Thanks for writing, guys! For the moment, I’m taking the original post offline while I reflect upon the ideas raised in correspondance, to make sure I am being fair to Taiwanese culture.

Particularly, the idea of ‘cultural translations’ as a way of understanding ‘white lies’ in other cultures, is an interesting one.

“I just wondered if I could borrow some coffee” might be considered an example of a similar situation in early dating in western society, which due to its familiarity seems more an excuse than a direct lie or misrepresentation.

Is that something to do with the ’short-term’ nature of borrowing coffee, as opposed to the longer-term nature of ‘language exchange’ or ‘research’? Or, is it perhaps the ‘distance’ of borrowing coffee from a stranger, as opposed to seeking closer forms of interaction such as language exchange? Or is it something else? Am I applying two sets of standards here?

Either way, the idea of the necessity of an excuse in Taiwanese society, as part of forming a friendship, seems to remain as a seperate issue. This is something I’m still puzzling over.

This can be found near Chihkan Fort, Tainan…

However, I have an illness that has meant I’ve been spending a little time in hospital, and getting plenty of rest. I’ll post more as the doctors find out more about the illness. I can say though that the preliminary results are reasonably encouraging, so far.

I am fortunate to have some awesome friends who looked after me when I was in hospital, who have helped me through this illness and been there to talk to. I don’t know how many of them read this blog. But, hey friends. You know who you are. Thankyou.

I also want to say thankyou to all the people who keep checking this blog to see what I’m writing. It is comforting to see that although I haven’t been able to write much recently, you are still popping by.

Unfortunately though, for the moment this blog is on vacation, hopefully to resume normal service next month, depending on what the doctors find.

For everyone else though, it’s Chinese new year. Rather, it’s about to be Chinese new year. There are a few more hours of pig year left; then the year of the rat will begin.

I quite liked the year of the pig. Apart from the bad luck at the end, most of the year went well; I made some new friends; I saw new things; I learned new stuff; and life was… well… not bad. Quite good, actually. My parents continue to enjoy the start of their happy retirement. My brother is still happily married. Some of my friends have new children, and some have children on the way. Life goes on.

Outside, there are firecrackers going off everywhere, even out close to the hills and countryside of Taoyuan. Fireworks are flying into the air and coming disturbingly close to my bedroom window. I had a direct hit against the window last year. This year has been a little less terrifying, but we haven’t yet reached the main event yet. I expect I won’t be getting too much quality sleep though.

Happy Chinese new year, everyone. I hope the year of the rat is lucky for all of us, and I hope I can resume normal service and start writing about Taoyuan and life in Taiwan again, soon.

Gong hsi fa tsai!

(picture via Spring’s Greetings)

An ETF is just a form of index tracking fund, that can be bought and sold as though it was a company. Index tracking involves copying the performance of a group of shares, usually a well known group. For example, an index might contain the largest 500 companies in a particular country (the SP500, DAX or FTSE100, for example).

If you think of ETFs as a pretend company listed on the stockmarket, that performs like the average company in the market, you wouldn’t be a mile from the truth. For example, “ISF” is the name of one ETF, whose share price mirrors the level of the FTSE100. It also pays out the same dividend as the companies in the FTSE100, on average (less a fairly small annual charge).

Internationally, ETFs have been available to the public for a few years, and you can purchase ETF shares corresponding to almost any major stockmarket index: America, Europe (or individual countries in Europe), Asia (or individual countries in Asia), …

Unlike a mutual fund, ETFs don’t have an upfront charge to buy in units of the fund; nor an exit charge; and typically, ongoing annual charges are tiny - 0.4% per year being easily achievable on most major indices.

So why do I bring this up today? Well, for about a year I’ve been trying to find a way to invest in ETFs from Taiwan, so that my Taiwanese friends can enjoy the almost magical returns of passive, long-term-buy-and-hold index investing.

To date, I’ve only found ‘fake’ ETFs available through some Taiwanese banks - where “ETF” has been included as part of the name of a traditional mutual fund, to try to make it sound trendy, new and fashionable. These ‘ETFs’ aren’t worth spitting on; they’re not tradable like real ETFs; there’s often no real attempt to actually replicate a well-known index; they have high annual charges; and remarkably, they typically have costly entry and exit charges.

However, the Financial times reported today that the Taiwan Stock Exchange is to list more than a dozen real ETFs mirroring the indices of countries all across the world.

This is great news if you’re living in Taiwan, and especially if you’re limited to investing in Taiwan. These ETFs will offer an ‘easy to get in, easy to get out’ way of investing in index trackers, and at low cost - no upfront costs besides a small share dealing charge, and a tiny annual management fee.

For anyone who just wants to invest in international stockmarkets, but doesn’t want to learn about shares or funds or fund managers, this is a great choice. Also, there’s bucketloads of evidence that passive index trackers outperform traditional actively managed mutual funds, after charges are taken into consideration, so this is really a superbly effective way to invest spare money.

Anyway, please don’t take my word for any of this - this is a blog post, after all, not financial advice. Still, I’d recommend to anyone with some spare dosh, currently living in Taiwan, that it would be well worth your time to learn a little bit about ETFs.