Another Property Brake

Source : Weekend TODAY, October 27, 2007

Govt scraps 'outdated' deferred payment scheme

Property punters and those financially lax, you're next.

The latest measure to keep prices stable crept up on the property market late on Friday afternoon, when the Government suddenly took away a popular financing option for buyers of uncompleted private homes and offices.

With immediate effect, buyers can no longer ride on the deferred payment scheme, whereby a purchaser not only pays a small fraction of the price upfront, he can also wait a couple of years before forking out the remainder.

Such grace was needed during the economic slump of 1997, when the scheme was introduced to encourage demand.

But in good times like today, it is "no longer relevant", said National Development Minister Mah Bow Tan.

Scrapping the scheme will also "encourage greater financial prudence as buyers will have to ensure they have sufficient funds or are able to secure adequate loans from banks before they commit to buying a property", said the Urban Redevelopment Authority (URA).

While most industry players and analysts agreed with the rationale, some were puzzled by the timing.

Calling the removal a "wrong signal" to investors, property analyst Colin Tan wondered why there was a need for such a sentiment-pricking measure when data do not suggest that speculative activities are anywhere near 1996 levels.

A decade ago, the Government stepped in with painful curbs, chief of which was a tax on gains made from property sales done within three years from the time of purchase.

In this round's booming property market, the authorities have implemented a suite of "softer" measures including tweaking land supply, repeatedly warning about "monitoring" the market, singling out bullish projection by certain research firms and raising development charges.

As it is, investor confidence has softened due to growing fears of a United States recession triggered by the ongoing credit crunch, said Mr Tan, research director at Chesterton International.

Furthermore, didn't several officials come out to say there was no bubble forming in the property market, he asked.

But in Mr Mah's view, there are now "signs of overheating", even though the strong economy has also been behind the 20 per cent surge in private home prices since the start of the year.

"Don't forget with the scheme, you actually encourage speculators to come in, so it's not necessary to add further to the current market," he told reporters on the sidelines of an event on Friday evening, shortly after the URA released a statement about the scheme's removal. The announcement came after the close of the stock market and so did not touch property-related stocks, which might fall next week after digesting what some deem to be negative news.

The Real Estate Developers' Association of Singapore (Redas) said in a statement, which mirrored factors listed in the URA statement, that it "understands" the Government's decision "in view of the strong economic growth, buoyant property market and positive employment situation".

Colliers International's research director Tay Huey Ying was not surprised by the measure, which she viewed as "preventive action" against overheating and financial imprudence.

A recent sign that the Government had apprehensions about the DPS came earlier this year, she said. In April, the central bank had warned that the widespread use of deferred payment schemes (DPS) by developers could pose additional risks to banks. Under such plans, a buyer could put down a 10-per-cent downpayment and then pay the remainder when the Temporary Occupation Permit (TOP) is issued near to the project's completion date. That grace period could be two or three years. So, the scheme essentially shifts the financing burden away from households or office-space buyers, to developers and construction firms. In addition, some developers have the practice of selling bonds backed by future payments promised by buyers of units under construction.

At the same time, home loans growth here have continued to hit new highs month after month, as those on DPS start borrowing from banks when the TOP date nears.

City Developments Limited (CDL), in reaction to the measure, said the company has been "actively discouraging" homebuyers from using the DPS by informing them that the scheme effectively means paying 5 per cent more at the end of the financing period.

But would scrapping the scheme spell fewer buyers and lower demand? Ms Tay feels the property price recovery will not be derailed, especially not in the mass market, where speculative activity accounts for just 5 per cent of total sales. Furthermore, those who use the deferred payment plan number fewer than those who pay progressively, meaning making payments at various stages of the project's completion, said CDL spokesman Gerry de Silva.

In contrast, HSBC reportedly said in April that 60 per cent of its customers who bought properties under construction opted for the DPS.

Now that the deferred payment scheme is gone, it is "good news for the loans market, as more property buyers would now be taking loans with banks", said United Overseas Bank.