The central bank’s new credit controls for luxury homes sent a chill through the real-estate market, with transactions dropping last month from May, snapping four consecutive months of increases and stoking pressure for a price correction.
Although luxury houses account for only a tiny fraction of real-estate transactions, they serve as a guide for property values in the residential market, given the lack of transparency on actual transaction prices.
“Housing transactions are bound to weaken further in the second half of this year, with prices falling as sellers seek to cash out, while buyers prefer to stay on the sidelines,” said Billy Yen (顏炳立), general manager of DTZ, an international property consultancy.
Yen, who was earlier bullish about the market outlook, said he was no longer optimistic after the central bank on June 21 tightened credit controls for upscale homes nationwide.
In its latest bid to curb property speculation, the central bank asked lenders — state-run and private alike — to cap loans for luxury houses at 60 percent of their value and drop the practice of allowing borrowers to only pay interest and delay principal payments for up to several years.
The monetary policymaker defines luxury homes as those valued at more than NT$80 million (US$2.68 million) in the Greater Taipei area and NT$50 million elsewhere in the country.
Housing transactions dropped 6 percent in Taipei City and 6.7 percent in New Taipei City (新北市) to 3,684 units and 6,582 units respectively last month, compared with a month earlier, data from the city governments showed.
Sentiment also turned weaker in central and southern Taiwan, with housing transactions dipping 6.1 percent in Greater Taichung and 15 percent in Greater Tainan. Greater Kaohsiung bucked the trend, with a 4.1 percent increase, thanks to the completion of a new apartment complex.
The figure in Greater Kaohsiung would have slipped, if not for the 800 new apartment units purchased earlier, said Tseng Chin-der (曾敬德), a researcher at Sinyi Realty Inc (信義房屋), the nation’s only listed broker.
To close the loopholes, the central bank also included home renovations and other real estate-linked loans in the 60 percent limit, significantly raising the costs for owning upscale houses.
“The new mortgage restrictions have seriously dampened buying interest in luxury homes,” Yen said. “Previously, a product [house] attracted on average three prospective buyers. Now, the number has dropped to zero in some cases.”
Luxury home purchases now require double capital, prompting potential buyers and investors to reconsider the wisdom of parking their funds in real estate, especially as the special sales levy makes capital gains unlikely, Yen said.
Productivity Architect Co (生產力建設), a Greater Taichung-based developer, called off plans to auction four luxury housing units late last month to avoid drawing the central bank’s attention, he said.
Yen expects tighter lending terms to induce a price correction for luxury houses in less popular locations as stressed owners, especially of pre-sale projects, are under pressure to exit or bear far higher holding costs.
The existing home market is also expected to see an increase in supply ahead of the implementation of a regulation requiring sellers to register actual transaction prices beginning Aug. 1.
The new rule aims to minimize the chances of developers and contractors setting unreasonable prices and may pave the way for tax reform, with property taxes being based on actual transaction prices instead of lower government-assessed values.
Sellers, who gained an upper hand last quarter, may soften prices to cope with lower loan-to-value ratios, said Chuang Meng-han (莊孟翰), an industrial economics professor at Tamkang University.
However, prospective buyers are likely to wait and see until these changes are assimilated into the market, Chuang said, adding that this would affect transactions.
Chuang said he expected housing prices to fall by 5 to 10 percent in the capital and by 15 to 20 percent in New Taipei City, with the trend more evident in areas with large housing supplies.
“It is better for buyers to be patient and to compare prices before making a decision,” he said.
The weakening sentiment is projected to depress housing transactions by 10 to 15 percent in the coming two quarters, said Andy Huang (黃舒衛), spokesman for Evertrust Rehouse Co (永慶房屋), the nation’s largest real-estate broker by number of outlets.
The restrictions on home renovation loans and second-home financing have added to the difficulties, as they have cut access to capital for people who plan to buy a second house by mortgaging their first home, he said.
Higher down payment requirements will also slow growth from replacement demand, as most people will have to sell their existing homes to obtain enough funds to buy a new one, Huang said.
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