The Future of Taiwan's Housing Market: Nuclear Energy, Electricity Prices, and the Potential for a Price Drop
This article explores the potential impact of Taiwan's shift to a nuclear-free energy policy on the housing market, specifically the possibility of a significant price decline and the factors contributing to this trend. It also discusses the financial implications for homeowners and potential buyers.
Taiwan's Energy Policy Shift
Transitioning Away from Nuclear Power
Taiwan has officially transitioned into a nuclear-free zone with the decommissioning of its last nuclear power plant on May 17th. The debate surrounding this decision has evolved into a political issue rather than a scientific one.
Rising Electricity Generation Costs
-
Nuclear Power: Historically, nuclear power was the most cost-effective energy source at approximately NT$1 per kilowatt-hour.
-
Coal: Coal, a significant polluter, costs around NT$2.3 per kilowatt-hour.
-
Natural Gas: Natural gas, now the primary energy source, is the most expensive, ranging from NT$3.5 to NT$4 per kilowatt-hour.
The shift to natural gas is driven by the need to reduce carbon emissions and air pollution, which have been linked to high rates of lung cancer in Taiwan. However, this comes at the cost of significantly increased electricity generation expenses.
Financial Implications for Taipower
Sustained Losses and Government Subsidies
Taipower, Taiwan's state-owned power company, has been incurring substantial losses. These losses have required significant government subsidies, amounting to hundreds of billions of NT dollars annually. The company's losses were smallest in 2021 (NT$41.7 billion), but reached NT$227.2 billion in 2022, NT$197.6 billion in 2023, and are estimated to be NT$50 billion this year.
The Inevitable Rise of Electricity Prices
To address its financial woes, Taipower faces two options: reduce costs or increase prices. Since reducing generation costs is challenging due to environmental concerns and the reliance on expensive natural gas, raising electricity prices becomes almost inevitable.
Impact on Inflation
Increased electricity prices will contribute to inflation, affecting the cost of goods and services across the economy. This presents a dilemma for the government, which must choose between allowing inflation to rise or further subsidizing Taipower with taxpayer money.
The Housing Market Connection
Inflation and Interest Rate Hikes
Inflation, driven by rising electricity prices, will likely prompt the central bank to raise interest rates to curb inflationary pressure. Higher interest rates are a well-known headwind for the housing market.
Increased Mortgage Costs
-
Reduced Buyer Demand: Higher mortgage rates make buying a home less affordable, decreasing demand.
-
Increased Seller Supply: Existing homeowners face higher mortgage payments, potentially leading to an increase in the number of properties for sale.
A combination of decreasing buyer demand and increasing seller supply will lead to downward pressure on housing prices.
Echoes of the 2008 Financial Crisis
The speaker draws parallels with the 2008 US housing market collapse, highlighting the dangers of excessive lending to individuals with limited ability to repay their mortgages.
The "New Youth Home Loan Program" (新青安) and Potential Risks
The New Youth Home Loan program, designed to make homeownership more accessible, offers subsidized interest rates and grace periods on principal payments. However, this program might create risks by encouraging people with low incomes to take out large loans, similar to subprime mortgages that lead to housing bubble burst in the US. Once the initial grace periods expire, many homeowners may struggle to make payments. This may lead to a surge in foreclosures, potentially triggering a significant decline in housing prices around 2027 or 2028.
Potential Housing Market Crash
The convergence of rising electricity prices, increased interest rates, and a wave of New Youth Home Loan recipients struggling to make payments could lead to a substantial correction in the housing market. While a complete collapse is deemed unlikely, a significant price drop is a distinct possibility. The speaker suggests closely monitoring mortgage default rates as a key indicator of potential market instability. A sharp rise in default rates could signal an impending crisis.
Advice for Potential Homebuyers
Evaluate Personal Financial Circumstances
The speaker emphasizes that the decision to buy a home should be based on individual financial readiness rather than market timing.
Three Key Criteria for Purchasing a Home:
- Immediate Need for Housing: Prioritize purchasing a home if immediate housing is needed.
- Unique Opportunity: If a property is viewed as exceptionally desirable and rare.
- Affordable Mortgage: Mortgage payments (principal and interest) should not exceed one-third of monthly income.
If you meet the aforementioned conditions, you can buy a house now.
Buying vs. Renting
Renting offers more flexibility and potentially better financial returns through investment. Homeowners not only have to pay mortgage interests higher than rental costs, they must also forgo the investment oppurtunity with downpayments. The speaker uses an example of a young single woman purchasing a home using The New Youth Home Loan program, and how a downturn could have devastating effects.
Time the Market
The speaker advises waiting for a potential market correction around 2026 to 2028. At that time, prices will be lower, and it will be easier to find affordable homes.
{#