Taiwan’s central bank (CBC) opted to maintain the benchmark discount rate at 2.00% during the June 13th meeting. Additionally, they lowered the loan-to-value (LTV) ratio for second home loans and raised the reserve requirement ratio (RRR) by 25bps. The decisions on interest rates and credit controls were anticipated, while the RRR hike came as a surprise.

Tightening of credit controls

Specifically, the CBC lowered the LTV cap on second home loans in designated areas from 70% to 60%. This marks the sixth round of selective credit controls introduced since December 2020, aimed at cooling the property market and ensuring financial stability.

Property prices have been on the rise since 2H23, with a YoY increase of 10.5% in Sinyi housing prices in 1Q24. Leading this increase are areas including Hsinchu, Taoyuan, and Kaohsiung, partly due to the expected expansion of facilities by major tech companies like TSMC and Nvidia.

Concurrently, banks have seen accelerated growth in housing loans, reaching 9.1% YoY in April. This growth is partly fueled by government initiatives offering preferential housing loans to support young homebuyers since 2H23. As a percentage of banks’ total loan portfolios, housing and construction loans have reached a record high of 37%.

The CBC’s LTV requirements mirror the previous round of selective credit controls in 2014. Back then, after the CBC’s final round of LTV tightening in June, the property market underwent a correction, with Sinyi housing prices slowing from a YoY growth of 9.5% in 1H14 to 3.5% in 2H14, further declining to -2.4% in 2015 and -3.2% in 2016. However, this correction was not primarily due to credit controls, as banks’ housing loan growth remained stable at 4.6% YoY in 2H14, then modestly slowed to 3.3% in 2015 before rebounding to 4.5% in 2016.

The property market downturn in 2014-2016 was largely influenced by the government’s measures to cool the property market, including increasing the base tax rate for non-self-use housing and levying a consolidated housing and land tax.

Additionally, Taiwan’s economy slipped into a technical recession in 2015 due to the slowdown in China, which also put downward pressure on the property market. GDP growth decelerated from 4.7% in 2014 to 1.5% in 2015, leading to weakened household income conditions, and CPI inflation dropped from 1.2% in 2014 to -0.3% in 2015, resulting in a rise in real interest rates and real borrowing costs.

A property market correction akin to that of 2014 seems unlikely this time. There is no strong indication of property market tightening measures from President Lai Ching-te’s newly inaugurated government, which assumed office in May. During the election campaign, President Lai expressed support for increasing the non-self-use housing tax rate, but also emphasized initiatives such as expanding the supply of social housing, enhancing rental subsidies, and extending interest rate subsidies for young home buyers.

Moreover, macroeconomic conditions are more favorable compared to 2014. The economy is poised for a cyclical recovery driven by the upturn in the global electronics sector, particularly AI-related advancements. This has prompted the CBC to revise its 2024 GDP growth forecast upward at this meeting, from 3.2% to 3.8%.

RRR hike

The RRR hike marks the first increase since September 2022. According to the CBC’s policy statement, the RRR hike aims to enhance the effectiveness of selective credit controls and curb the flow of credit resources into the real estate market.

The impact of this RRR hike is expected to be moderate, with further hikes of 25-50bps possible in 2H24. This 25bps RRR hike is estimated to immobilize liquidity in financial institutions by TWD120bn, equivalent to 0.2% of the broad money supply M2. Even after this hike, the RRR remains 50bps lower than the peak levels seen in 2008, suggesting room for further increases going forward.

No change in interest rates

The interest rate policy is contingent upon macroeconomic conditions. The CBC preemptively raised rates by 12.5bps in March to counter inflation expectations stemming from electricity price hike. Despite the increase in electricity prices, inflation figures did not exhibit significant upward surprises, with May's CPI at 2.2% YoY and core CPI at 1.8%. This has provided some reassurance to the CBC, prompting a slight downward revision in its 2024 inflation forecast during this meeting, from 2.2% to 2.1%. Consequently, we expect the CBC to keep the benchmark discount rate steady at 2.00% for the remainder of this year.

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