During the September 19th meeting, Taiwan’s central bank (CBC) further lowered the loan-to-value (LTV) ratio on housing loans, raised the reserve requirement ratio (RRR), and kept the benchmark rate unchanged at 2.00%. These decisions align with our expectations.

Specifically, the CBC reduced the LTV ratio for second home loans from 60% to 50% and expanded the designated areas from six special municipalities, Hsinchu City, and Hsinchu County to nationwide. The LTV ratios for third home loans and high-value housing loans were also cut from 40% to 30%. Additionally, there will be no grace period for first home loans for individuals who already owned a property. This marks the seventh round of selective credit controls since December 2020, aimed at preventing credit bubbles, cooling the real estate market, and safeguarding financial stability.

Furthermore, the CBC raised the RRR by 25bps, marking the second consecutive quarter of increases following a similar adjustment in June. This RRR hike is intended to enhance the effectiveness of credit controls and reduce the flow of credit into the real estate market.

A three-pronged approach to curb real estate loans

The CBC is adopting a comprehensive strategy that includes LTV adjustments, RRR hikes, and moral suasion measures. In August, the governor met with the general managers of 34 local banks, urging them to implement self-disciplinary measures to manage real estate loan volumes by September 6th. The CBC has indicated that real estate loans—encompassing housing purchases, repairs, and construction—should decrease to 35%-36% of banks' total loans, down from 37.5% in August. To achieve this, banks must either reduce real estate lending or expand their non-real estate portfolios. If non-real estate loan growth continues at its current pace, real estate loan growth will need to drop to 0% YoY by September 2025, a significant decline from 9.5% in August 2024.

The Financial Supervisory Commission (FSC) has a separate rule requiring banks' real estate loans not to exceed 30% of their total deposits and issued debentures. Many banks set an internal alert level at 28%, and as of August, the ratio was at 26.6%. Some banks may need to cut back on real estate loans or boost their deposit bases to avoid breaching this level.

A slowdown in the real estate loan market appears to be underway. Recent information from the Bankers Association indicates that many banks have begun to limit housing loans or increase interest rates. Eleven banks have reported "sequential allocations," "scheduled allocations," "long review times," or "limited quotas" for housing loans, with some raising mortgage interest rates to start at 2.6%, above the average rate of 2.2%.

Government measures to cool property prices

The government has also implemented anti-speculation and tax measures to stabilize property prices. In August, the Ministry of Finance conducted a second round of inspections on the preferential housing loan program for young homebuyers, uncovering 73 cases of fraudulent activity.

Amendments to the House Tax Act took effect in July, raising tax rates on non-self-use residential properties from 1.5%-3.6% to 2.0%-4.8%. The registration method for non-self-use residential properties has shifted to a nationwide system, increasing the tax burden for owners of multiple properties in different locations.

Recent reports from major real estate brokerages show a notable decline in transaction volumes in August, with companies like Yung Ching, H&B, Taiwan Realty Estate, and CTBC Real Estate reporting YoY drops of 8%, 17.4%, 15.9%, and 2.5%, respectively.

Implications for interest rate forecast

Following the Fed’s 50bps rate cut, the CBC’s recent policy decisions reinforce our expectation that it will decouple from the Fed, maintaining the benchmark rate at 2.00% through 4Q24-4Q25.

Further rate hikes are unlikely as inflation pressures are expected to ease over the next year. The CBC's latest macroeconomic forecasts indicate that CPI inflation will ease slightly to 1.9% in 2025, down from 2.2% in 2024.

Rate cuts also seem improbable in the coming year; the governor noted at the press conference that a significant slowdown in inflation, falling below the 1.5-2.0% range, would be necessary to consider rate cuts.

Additional RRR hikes remain possible. Following the latest increase in June, M2 growth slowed to 5.8% YoY in August, down from 6.3% in June. The 25bps RRR hike in September could help bring M2 growth down to 5.0%-5.5%, still within the upper half of the CBC’s target range of 2.5%-6.5%. Meanwhile, more aggressive-than-expected Fed rate cuts could increase the chances of a soft landing in the US, encouraging capital inflows into emerging markets and exerting upward pressure on M2 growth.

Implications for GDP growth forecast

We maintain GDP growth forecasts at 4.2% for 2024 and 2.6% for 2025, anticipating a soft landing in the real estate market. The CBC also projects GDP growth at a solid 3.8% this year, slowing to 3.1% in 2025.

Taiwan has experienced two significant property market corrections in the past two decades: during the 2008 global financial crisis and the 2014-2016 domestic tightening. In both cases, price declines did not exceed 10%.

Current credit controls are more stringent than ever. However, the benchmark interest rate remains 162.5bps below its peak in August 2008, and the RRR is 25bps lower than its peak. Tax measures are relatively moderate compared to the 2014-2016 period, which included taxes on house and land transactions in addition to the non-self-use housing tax. Barring a recession in major economies that could trigger an external shock, the real estate market and the overall economy are expected to avoid a hard landing this time.


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