Chou Chia-hui is worried.
Two months ago she put the Taipei investment property she bought for T$9m ($272,000) in 2004 on the market for T$14m, got rid of her tenants and looked forward to a tidy profit. But no potential buyer has even come to take a look and the Taiwan Stock Exchange employee worries she may be confronting the end of a short-lived property boom.
Taiwan’s property market had its first strong rally in years in 2006 after emerging from a five-year slump in 2002. The boom – which has seen prices in Taipei city, the island’s best-performing market, jump 15 per cent – has been fuelled by easy credit.
However, the growth is also increasingly reliant on an expectation of closer economic links with China.
“Last year’s boom was driven by a very favourable financing environment, government deregulation and the expectation of agreements that would allow regular, non-stop flights to and from China and that would bring large numbers of Chinese tourists here,” says Victor Chang, a veteran property market researcher.
“But this year the first two drivers have broken away, and the speculation on cross-Strait progress has remained as the only driving force,” he adds.
Taiwanese officials have been in discussions with their Chinese counterparts on tourism and flights for more than a year and have reached consensus on most technical details.
A deal on tourism and its expected positive impact on the hotel sector and consumer demand in certain regions of Taiwan has already been priced in by the property market and related stocks, most analysts say. But an agreement on flights could have more far-reaching consequences.
Peter Sutton, head of research at CLSA in Taipei, argues that many of the more than 1m Taiwanese working in China for Taiwanese companies would prefer to live at home and could be drawn back by faster travel times between China and Taiwan.
“If investors believe 100,000-200,000 extra people will be in Northern Taiwan they will capitalise that quickly into property values,” he says.
But as Taiwan moves towards legislative elections in December and presidential polls next March, a deal becomes more unlikely the longer it is delayed.
Mr Chang believes a failure to close a deal before the election will not trigger a property sell-off. “Most speculators will hang on with the expectation that if a deal doesn’t come now, it’ll come after the elections – 2008 is working like a carrot dangling in front of investors’ faces,” he says. But part of the carrot is investors’ hope that the opposition Kuomintang, which has pledged more pragmatic policies towards China than the ruling party, will win the 2008 polls and move aggressively to deregulate economic ties with the mainland – an expectation facing serious political hurdles.
“Taiwan is infamous for having this kind of optimistic forecast where people are incorporating the expectation of a cross-Strait breakthrough into the market,” says Adam Rosenfeld of CB Richard Ellis. Similar hype after a 1992 détente in cross-Strait relations led to a property bubble from which some parts of Taiwan took more than a decade to recover.
There are economic risks, even to a “soft landing”, which could affect consumer spending. Ms Chou, for example, has two mortgages. One comes up for renewal this summer and she is likely to have to pay higher rates.
There are also fears that any slump could hurt the island’s 43 banks. New mortgage loans climbed to historic highs in the second half of 2006. But cut-throat competition in the banking sector means riskier mortgage portfolios are yielding small margins.
Because of that, says Chris Hunt, head of research at Macquarie Securities in Taipei, even a 50 per cent increase in non-performing loans would erase most banks’ mortgage profits.
The government is also indicating its concern by instructing state-owned lenders to exert caution in mortgage lending and announcing new taxes on property speculation.
