A New Policy Paradigm
Edited by Susan Wachter, Man Cho and Moon Joong Tcha
Chapter 8: Construction financing in Taiwan: current state and policy regime
Many literatures (for example, Jin and Zeng, 2004; Goodhart and Hofmann, 2008) have suggested that the financial environment and policy both have enormous influence on the real estate market. From the perspective of market demand, interest rates affect the purchasing power of home buyers. From the viewpoint of market supply, interest rates affect the investment and operation of construction businesses (Blackley, 1999; Berger-Thomson and Ellis, 2004). Governments typically use interest rates or credit control to regulate the boom or bust of the real estate market. However, many countries around the world are currently in environments of low interest rates under policies of quantitative easing, whereby borrowers have easy access to funds. This could lead to over investment and cause prices to rise sharply in the real estate market. One of the major causes of the U.S. subprime mortgage was the over investment in real estate, which caused housing prices to surge upward. When economic growth abated and the flow of funds began to reverse, housing prices declined and borrowers were unable to repay their mortgages, resulting in a crisis in the financial industry. Literatures have argued that the inadequately applied monetary policy of the U.S. is responsible for this crisis. To stabilize the financial environment, governments must consider changes in the real estate market when formulating monetary policy. Taiwan has long been in an environment of an easing monetary policy. People tend to ignore market risk, credit risk, or macroeconomic risk.
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