Why Taiwan's Housing Prices Remain Stubbornly High: From Demographics to Policy Distortions

According to the basic logic of economics, when a country's population begins to decline, its fertility rate drops to the world's lowest, and the proportion of young people continues to shrink, housing demand should contract accordingly, and prices should return to rational levels. Yet Taiwan's real estate market presents a paradoxical picture: in 2020, Taiwan's population experienced negative growth for the first time, but in that same year, the housing price index hit an all-time high and has continued to climb ever since. What structural factors and policy distortions lie behind this paradox of "declining population, rising housing prices"?

I. Objective Factors That Should Be Driving Prices Down

Declining Birth Rates and Negative Population Growth: A Fundamental Shift in Demand

Taiwan's fertility rate has fallen to the lowest level in the world. According to statistics from the Ministry of the Interior, Taiwan's total fertility rate in 2023 was just 0.87, far below the 2.1 replacement rate needed to maintain population stability. In 2020, Taiwan's population experienced negative growth for the first time, with deaths exceeding births — a trend that has continued to worsen. The National Development Council projects that Taiwan's population will decline to 14.49 million by 2070, a reduction of approximately 40% from the current level.^[1]

From the perspective of housing economics, population decline directly implies shrinking housing demand. Japan's experience provides a stark comparison: after the economic bubble burst in the 1990s, Japanese housing prices declined continuously for over twenty years, with vacancy rates exceeding 30% in some remote areas. Research by the Nomura Research Institute has shown that Japan's housing oversupply problem is closely correlated with its population decline.^[2]

Taiwan's current number of vacant homes is already quite staggering. According to the Ministry of the Interior, there were approximately 890,000 low-utilization residential units (commonly called "vacant homes") in Taiwan in 2022, accounting for 9.8% of the national housing stock. If occasionally used residences are included, the actual number of idle housing units is even higher. These figures indicate that Taiwan does not lack houses — what it lacks is "affordable houses."^[3]

Construction Costs: A Supply-Side Factor with Limited Growth

One common explanation for rising housing prices is increasing construction costs, including labor costs, building material prices, and land costs. However, a careful examination of the data reveals that the increase in construction costs is far from sufficient to explain the surge in housing prices.

According to the Construction Engineering Price Index from the Directorate-General of Budget, Accounting and Statistics, construction costs rose cumulatively by approximately 25% between 2015 and 2023. During the same period, however, the Sinyi Housing Price Index shows that nationwide housing prices rose by over 50%, with metropolitan areas outside Taipei seeing increases of 60% to 80%. In other words, the rise in housing prices was two to three times the increase in construction costs.^[4]

More notably, the largest variable in construction costs — land costs — is itself a function of housing prices. When housing prices rise, developers are willing to pay higher land prices, driving up land costs; it is not the case that rising land costs "cause" housing prices to increase. This is an important clarification of causality: in most cases, it is demand that drives housing prices, and housing prices that drive land prices — not the other way around.^[5]

As for labor costs, the construction industry in Taiwan does indeed face labor shortages, but wage adjustments have been relatively moderate. According to the Ministry of Labor, the average wage in the construction industry grew approximately 20% between 2015 and 2023, roughly in line with overall price increases, without any abnormal spikes.^[6]

II. Unintended Consequences of Government Policies

The New Youth Housing Loan: Manufacturing Demand Through Subsidies

In August 2023, the government launched the "New Youth Ease-of-Mind Home Purchase Preferential Loan" (commonly known as the New Youth Housing Loan), offering favorable terms including 40-year mortgage terms, a 5-year grace period, and interest rate subsidies. The policy was intended to help young people purchase homes, but its actual effects may have been counterproductive.

From an economic perspective, demand-side subsidies tend to push up prices rather than lower the barrier to homeownership. This follows the basic logic of supply and demand: when more people can afford mortgage payments, housing demand increases, and in the absence of a corresponding increase in supply, prices inevitably rise. After the launch of the New Youth Housing Loan, housing transaction volumes did indeed rebound noticeably, but prices also climbed, partially or even fully offsetting the improvements in "affordability" that the preferential mortgage was supposed to provide.^[7]

The long-term effects are even more concerning. A 40-year mortgage means that a 30-year-old homebuyer will still be carrying mortgage debt well past the age of 70, beyond retirement. This not only increases personal financial risk but also compresses household financial flexibility to the breaking point. One of the lessons from the 2008 U.S. subprime mortgage crisis is precisely that excessively loosening mortgage conditions accumulates systemic risk.^[8]

Furthermore, the "grace period" feature of the New Youth Housing Loan — where only interest is paid during the first five years, with no principal repayment — creates a dangerous delayed effect. After the grace period ends, monthly payments will increase dramatically, and if the economic environment deteriorates or interest rates rise at that point, default risk will increase significantly. This "sweet now, bitter later" design essentially postpones problems rather than solving them.

Social Housing: A Token Solution

Social housing was a major policy commitment of the Tsai Ing-wen administration, with a target of building 200,000 social housing units. However, as of 2024, the combined number of completed and under-construction units stands at approximately 100,000, and most are concentrated in specific areas, having negligible impact on overall housing supply and demand.^[9]

The more fundamental issue is that Taiwan's social housing policy contains structural contradictions. First, social housing rents are typically set at 70% to 80% of market rates — seemingly discounted, but still a heavy burden for the truly disadvantaged. Second, eligibility restrictions for social housing applications (such as income caps) exclude many members of the "sandwich class" — middle-class households whose incomes are too high to qualify for social housing but too low to afford market-rate housing.^[10]

From an international comparative perspective, Taiwan's social housing stock represents approximately 0.2% of total housing, far below the Netherlands (30%), Austria (24%), Denmark (21%), the United Kingdom (17%), and even Japan (5.7%) and South Korea (5.1%). To achieve a meaningful market-regulating effect, social housing stock would need to reach at least 5%, which for Taiwan would mean approximately 450,000 units — more than double the current target.^[11]

Even more ironically, social housing policy may produce a "crowding-out effect": when the government announces plans to build large numbers of social housing units, developers anticipate increased future competition and may accelerate project launches and land acquisition, pushing up housing prices in the short term. This type of unintended consequence has been observed in housing policies across many countries.

Low Holding Taxes: An Institutional Design That Encourages Hoarding

Taiwan's property holding taxes (house tax and land value tax) have long been set at low levels, serving as a major factor that encourages property hoarding and suppresses housing circulation. According to data from the Ministry of Finance, Taiwan's effective property tax rate is approximately 0.1% to 0.2%, far below the United States (1% to 2%), Japan (1.4%), and South Korea (0.5% to 1%).^[12]

Low holding costs mean that the opportunity cost of keeping a home vacant is extremely low. For wealthy investors, holding multiple properties and waiting for appreciation while paying only minimal annual taxes is an exceptionally profitable investment strategy. This explains why Taiwan's vacancy rate remains stubbornly high even as large amounts of capital continue to flow into the housing market.

Although the government has introduced "vacancy tax" reforms to raise tax rates for owners of multiple properties, the actual rates remain far below international standards. More importantly, the tax base for house tax (the government-assessed current value of the property) has long been underestimated, at roughly only 20% to 30% of market value, significantly undermining the effectiveness of nominal tax rate adjustments.^[13]

III. Structural Demand-Side Support Factors

Intergenerational Wealth Transfers from the Baby Boomer Generation

Taiwan's post-war baby boomer generation (born approximately 1946 to 1964) were the primary beneficiaries of the economic miracle. They purchased real estate during an era of relatively low housing prices, and as prices soared, they accumulated substantial property wealth. Today, most members of this generation have either retired or are approaching retirement and have begun transferring their wealth to the next generation.

This intergenerational wealth transfer has had a profound impact on the housing market. Many young people receive substantial financial assistance from their parents when purchasing homes — ranging from down payment support to outright property gifts. According to surveys by real estate brokerages, the proportion of first-time homebuyers receiving parental financial support has been increasing year after year, with some surveys indicating that the proportion has exceeded 50%.^[14]

This "Bank of Mom and Dad" phenomenon has several important implications. First, it artificially sustains housing demand — even when young people's salaries cannot support housing prices, parental assistance fills the gap. Second, it exacerbates social inequality — young people with wealthy parents can enter the housing market, while those without family support are excluded. Third, it creates a self-fulfilling prophecy that "housing prices will always rise" — parents are willing to provide substantial assistance precisely because they believe real estate is the safest investment.^[15]

From a macroeconomic perspective, this intergenerational wealth transfer is actually a "spatial transfer" of wealth rather than its "creation." The appreciation of baby boomers' property values essentially represents a transfer of wealth from renters and future homebuyers. When this wealth is passed on to the next generation, it merely changes hands without increasing total social wealth.

The TSMC Effect: Spillover of Premium Tech Salaries

As the global leader in the semiconductor industry, TSMC offers salary levels far above the Taiwan average. According to TSMC's annual report, the average annual salary for its Taiwan employees in 2023 was approximately NT$3 million, more than five times the national average for employed workers. These "premium salaries" have created a cohort of homebuyers with exceptionally strong purchasing power, significantly impacting surrounding housing markets.^[16]

The most prominent case is Hsinchu. With TSMC's headquarters and major fabrication plants located in the Hsinchu Science Park, Hsinchu housing prices have doubled over the past decade. New development projects in Zhubei City have surpassed NT$500,000 per ping, rivaling outer Taipei districts. Similar effects have emerged in Tainan (Southern Taiwan Science Park) and Kaohsiung (Nanzih), where housing prices have surged abnormally in areas surrounding new TSMC facilities.^[17]

The TSMC effect is not simply a matter of "high salaries driving up housing prices." The deeper impact lies in how it changes the market's "reference price." When a large number of high-income homebuyers appear in a region, developers adjust their pricing strategies, setting new project prices to match the higher benchmark; existing homeowners also raise their asking price expectations. This "price anchoring" effect spills over into surrounding areas, even those where no TSMC employees reside.

Moreover, the TSMC effect carries an "anticipatory" component. When TSMC announces plans to build a factory in a location, housing prices often begin rising before construction even starts, as investors anticipate a future influx of high-paying jobs. This "expectation-driven" price increase can sometimes exceed actual fundamentals, creating localized bubbles.^[18]

The Low-Interest-Rate Environment and Capital-Driven Momentum

For the past decade and more, the world has been in a low-interest-rate environment, and Taiwan is no exception. The central bank's rediscount rate has remained at historically low levels for an extended period, and mortgage rates have followed suit. Low interest rates directly reduce the cost of capital for holding real estate, improve housing affordability, and attract more funds into the property market.

From an investment perspective, low interest rates compress returns on fixed-income assets (such as bonds and time deposits), forcing investors to seek alternative vehicles. Real estate, with its perceived "inflation hedge" and "stable appreciation" characteristics, has become a primary destination for capital. This "capital-driven momentum" is one of the key factors supporting housing prices.^[19]

However, since 2022, a global interest rate hiking cycle has begun, and Taiwan's central bank has also raised rates multiple times. In theory, rate hikes should suppress housing prices, but Taiwan's housing market appears to be "immune" to rising interest rates. This is partly because subsidy policies such as the New Youth Housing Loan have offset the impact of rate increases, and partly because the market expects the magnitude and duration of rate hikes to be limited. This phenomenon of "declining interest rate sensitivity" is worth close attention.

IV. Deep-Rooted Institutional and Cultural Factors

The Cultural Inertia of "Land Equals Wealth"

Taiwanese society harbors a deeply ingrained preference for real estate, closely tied to the traditional Chinese concept of "to own land is to possess wealth." Within this cultural framework, owning property is not merely an economic act but a symbol of social status, a milestone of adulthood, and a prerequisite for marriage. This cultural inertia creates a form of "irrational" housing demand — even when renting is more financially advantageous, people remain fixated on homeownership.^[20]

This cultural factor is particularly evident in the marriage market. Surveys indicate that a substantial proportion of Taiwanese women list "owning a home" as one of their criteria for choosing a spouse. This social pressure compels many young men and their families to devote all their resources to purchasing a home, further driving up prices.

From a behavioral economics perspective, the belief that "housing prices always go up" has formed a collective delusion. This belief creates a self-reinforcing cycle: because people believe prices will rise, they rush to buy; because everyone is rushing to buy, prices do in fact rise; and rising prices reinforce the belief that "prices will keep going up." Breaking this cycle requires either a major external shock or a long-term shift in mindset.

Structural Deficiencies in the Rental Market

Taiwan's rental market has long operated in a "shadow" state. Many landlords do not declare rental income in order to evade taxes, resulting in a lack of transparency in the rental market and inadequate protection for tenants' rights. This immature rental market, in turn, reinforces the notion that "buying is better than renting."^[21]

In many European countries, renting is the mainstream housing choice. Germany's homeownership rate is approximately 50%, and Switzerland's is even lower at around 40%, yet residents of these countries do not feel that their quality of living is inferior. The key lies in robust rental protection systems — long-term leases, rent control, and tenant rights protections — that make renting a stable and dignified housing option.^[22]

If Taiwan is to fundamentally address its housing problems, developing a sound rental market is an indispensable component. This requires greater transparency in the rental market, more comprehensive rental regulations, and long-term shifts in social attitudes. However, under the current political climate, such long-term reforms tend to be less popular than quick-fix policies like "home purchase subsidies."

V. Policy Recommendations and Reflections

Shifting from Demand-Side Subsidies to Supply-Side Expansion

The most significant blind spot in current policies is an excessive focus on "subsidizing demand" rather than "increasing supply." The New Youth Housing Loan, first-time buyer incentives, and various rental subsidies are all fundamentally demand-stimulating policies. When supply is relatively fixed, these policies only push up prices rather than improve affordability.^[23]

A more effective approach would be to increase supply — particularly the supply of moderately priced housing. This requires reviewing land use regulations, streamlining building permit processes, promoting urban renewal, and releasing idle publicly owned land, among other comprehensive measures. International experience shows that only when housing supply can flexibly respond to demand can prices be maintained at reasonable levels.

Raising Holding Costs to Curb Speculative Demand

The most direct way to curb property hoarding and speculation is to raise property holding costs. This means substantially increasing the effective tax rates on house tax and land value tax to bring them closer to international standards. At the same time, the tax base should be assessed at market value rather than relying on the severely underestimated government-assessed property values.^[24]

Raising holding taxes produces a dual effect: on one hand, it increases the cost of keeping homes vacant, incentivizing owners to rent or sell and thereby increasing market supply; on the other hand, it reduces the attractiveness of real estate as an investment vehicle, redirecting capital toward more productive uses.

Confronting the Structural Nature of the Problem

Most importantly, both policymakers and the general public need to recognize that Taiwan's high housing price problem is structural in nature and has no simple solution. Population decline will take decades to significantly affect the housing market; cultural shifts are a generational undertaking; and resistance from vested interests remains a major obstacle to reform.^[25]

However, acknowledging the complexity of the problem does not equate to passive inaction. On the contrary, it means that policy design must be more comprehensive, long-term, and integrated. Short-term, band-aid subsidies can produce counterproductive results; genuine solutions require addressing supply, demand, institutions, and culture simultaneously across multiple dimensions.

VI. Lessons from Japan's Bubble Collapse: How to Break Price Anchoring

Price Anchoring: The Collective Illusion That Prices Only Go Up

The "anchoring effect" in behavioral economics is key to understanding housing price rigidity. When market participants have experienced prolonged periods of rising prices, they use past high prices as an "anchor," believing that prices should remain at that level or continue to climb. Sellers are unwilling to sell below their psychological anchor price; buyers, expecting further increases, rush to enter the market. This bidirectional price anchoring makes it difficult for prices to fall even when fundamentals deteriorate.^[26]

Taiwan's housing market is currently in this state of price anchoring. Over the past twenty years, aside from a brief correction during the 2008 global financial crisis, housing prices have moved almost exclusively upward. This experience has reinforced the belief that "prices always go up," creating a collective cognitive lock-in. Breaking this anchoring typically requires an external shock — and Japan's experience offers the most profound cautionary tale.

The Formation of Japan's Bubble: 1985-1990

The formation of Japan's real estate bubble can be traced back to the 1985 Plaza Accord. To alleviate its trade surplus with the United States, Japan agreed to a significant appreciation of the yen. To counteract the export pressure caused by the stronger currency, the Bank of Japan implemented loose monetary policy, lowering the official discount rate from 5% in 1985 to 2.5% in 1987, maintaining low rates until 1989.^[27]

In this low-interest-rate environment, massive amounts of capital flooded into the real estate market. Between 1985 and 1990, commercial land prices in Tokyo more than tripled, and residential land prices more than doubled. At one point, the total value of all land in Japan exceeded four times the total value of all land in the United States — a country with just 4% of America's land area had land worth four times as much, a figure that itself reveals the absurdity of the bubble.^[28]

Japanese society at the time was pervaded by the "land myth" — the belief that land prices would never fall. Banks used land as collateral and lent generously to real estate developers; corporations redirected capital from their core businesses toward "zaitech" (financial engineering), speculating in stocks and land; ordinary families poured their savings into overpriced homes. This nationwide frenzy laid the groundwork for the eventual collapse.

The Onset of the Bubble's Collapse: A Domino Effect

In May 1989, the Bank of Japan began raising interest rates, gradually increasing the discount rate from 2.5% to 6% by August 1990. Simultaneously, the Ministry of Finance imposed "total volume controls," restricting the growth of real estate lending. These tightening measures became the final straw that broke the bubble.^[29]

The domino effect propagated as follows: first, higher interest rates increased mortgage burdens, causing marginal buyers to exit the market and new home sales to decline. Second, real estate developers, struggling with poor sales, faced cash flow difficulties and were forced to cut prices, breaking the expectation that "prices only go up" for the first time. Third, price cuts triggered a wait-and-see mentality as buyers began waiting for even lower prices, creating a negative feedback loop of "the more prices fall, the less people buy." Fourth, falling prices eroded the value of bank collateral, prompting banks to tighten credit, further suppressing demand. Finally, the deterioration of corporate and household balance sheets contracted consumption and investment, plunging the economy into recession, which in turn further depressed housing prices.^[30]

Once this domino effect was set in motion, it proved nearly impossible to stop. From the peak in 1991 to the early 2000s, land prices in Japan's six major cities fell by more than 70%. Some commercial properties lost up to 90% of their peak value. More importantly, the collective illusion of price anchoring was thoroughly shattered — the Japanese finally recognized that land prices not only could fall, but could fall for a very long time.^[31]

"Balance Sheet Recession": The Lost Three Decades

Economist Richard Koo's theory of "balance sheet recession" offers a profound explanation for why Japan fell into prolonged stagnation. When asset prices collapsed, the assets of corporations and households shrank, but their liabilities (mortgages, bank loans) did not decrease, creating a state of "technical insolvency" (assets less than liabilities). Under these circumstances, the primary objective of corporations and households was no longer pursuing profits or consumption but repaying debt and repairing their balance sheets.^[32]

When everyone is repaying debt rather than borrowing, even reducing interest rates to zero cannot revive the economy — this is why traditional monetary policy fails. The Bank of Japan lowered rates to zero and implemented quantitative easing, but with limited effect, because the problem was not insufficient credit supply but collapsed credit demand.

These "Lost Three Decades" carry important warnings for Taiwan. If Taiwan's high housing prices ultimately end in a crash, it could face a similar balance sheet recession. Currently, the mortgage burden on Taiwanese households is already quite heavy, with many young families devoting the majority of their income to mortgage payments. Should housing prices decline sharply, these families would be trapped in "negative equity," suppressing consumption and economic growth.

How to Break Price Anchoring: Policy Implications

Japan's experience reveals several key lessons:

• Prevention is better than cure: Once a bubble inflates to a certain size, there will be a price to pay no matter how it ends. Had Japan raised rates and tightened credit in time during 1987-1988, the bubble would not have grown so large. Policymakers should not allow bubbles to continue inflating, because the larger the bubble, the higher the cost of its collapse.^[33]
• Gradual adjustment is preferable to abrupt shocks: Japan's tightening policies came too quickly and too aggressively — from ultra-low interest rates to high rates in rapid succession, and from loose credit to total volume controls overnight. This sudden reversal exacerbated market panic. If Taiwan is to adjust its housing market policies, it should adopt a gradual, predictable approach, allowing the market time to digest and adapt.
• Breaking price anchoring requires "credible commitment": For the market to believe that "prices could decline," policies must be credible. If the government talks about cooling the housing market on one hand while rolling out home purchase subsidies on the other, the market will conclude that the government does not genuinely want prices to fall, and price anchoring will remain intact. Policy consistency and continuity are essential.^[34]
• Prepare for balance sheet effects: Even if a housing price correction is necessary, buffer measures should be prepared simultaneously — such as personal debt restructuring mechanisms, mechanisms for handling non-performing loans at financial institutions, unemployment relief, and career transition support. Japan's excessive delays in dealing with non-performing loans prolonged the recession period.

Ultimately, the key to breaking price anchoring lies in changing expectations. When a sufficient number of market participants believe that prices could decline, a wait-and-see mentality will spread, selling pressure will increase, and price adjustments will begin. This process can be triggered by policy changes or by external shocks (such as a major economic crisis). For Taiwan, proactive, gradual policy adjustments are far preferable to waiting for the market to impose a violent correction.

Conclusion: Housing Prices and the Future of Society

The persistence of high housing prices in Taiwan is the product of a complex system. Declining birth rates should cool the housing market, but policy subsidies have created artificial demand; construction cost increases have been limited, but speculation and hoarding have absorbed vast amounts of capital; young people's wages have stagnated, but intergenerational wealth transfers from parents have filled the gap; interest rates have risen, but the TSMC effect has created pockets of excess purchasing power.

The various components of this system reinforce one another, forming what appears to be an unbreakable "high-price equilibrium." Yet no equilibrium lasts forever. Japan's experience tells us that demographic forces will ultimately overwhelm other factors; America's experience tells us that overextended credit must eventually face a reckoning; and global experience tells us that no market goes up forever.

The question is not whether Taiwan's housing prices will correct, but in what form, at what point in time, and with what consequences for whom. Will it be a slow, orderly adjustment, or a violent, destructive crash? A policy-guided soft landing, or a market-imposed hard correction? The answers to these questions depend on today's policy choices and social consensus.

For the younger generation, understanding the structural factors behind housing prices can help them make more rational life decisions — whether that means gritting their teeth to buy a home, continuing to rent, or choosing to leave the high-priced metropolitan areas. After all, a house is merely the vessel for a life, not the totality of life itself. In a society where housing prices distort resource allocation and constrain the choices available to young people, redefining what constitutes a "good life" may be the most fundamental way forward.