Restoring A Genuine Property Market

Source : The Business Times, October 30, 2007

PROPERTY stocks were sent reeling yesterday following the government's announcement to discourage speculative buying in the real estate market. In contrast, bank stocks rose. The divergence in stock performance between the two market sectors comes down to this: what is bad news for speculators may prove to be good news for banks.

The scrapping of the scheme which allows homebuyers to delay payments on new property may turn out to be a positive for the financial institutions giving out housing loans, as the measure weeds out punters from genuine buyers. The deferred payment scheme introduced 10 years ago allowed buyers to make as little as a 10 per cent downpayment, and pay the rest upon completion - sometimes after a time lag of three years. This encouraged many to enter the property market. Speculators did not even take the trouble to get a loan - merely coming up with the downpayment, and selling before completion of the property.

In the last few quarters, when the market turned red hot, some observers were surprised by what appeared to be muted home loans growth. The reason was that the deferred payment scheme, which discourages the early draw-down on loans (or even taking up a loan in the first place), had diluted the impact of the booming market on housing loans. Indeed, it was common to hear, at the results briefings of the local banks, the deferred payment scheme put forward as one of the main factors for the slower-than-expected pace of home loans growth.

With deferred payment now no longer an option, more buyers will be driven to take up home loans. And loans will be drawn down progressively, with borrowers paying a certain percentage of the purchase price at various stages of completion of the property. This should be positive for the loan books of the banks.

Take DBS Bank, for one. Singapore's biggest bank had felt the 'lag' impact of the deferred payment scheme - it said a few months ago that it was expecting a sharper spike in home loans only in future quarters, due to investors taking out loans to pay for homes purchased using deferred payment schemes. With the scheme gone now, the bank told BT that the impact of the latest measure would be positive on its books - since, without the option of the deferred payment scheme, buyers have to seek financing and draw down the loans, if they don't want to use a lot of their own cash.

The removal of the deferred payment scheme is not just positive on the loan books. For some time now, there has been growing concern that the scheme shifted the banks' risk exposure from households to corporates. With buyers paying nothing in the early stages of a project with deferred payment, developers had to borrow more from the banks - or raise funds in the debt market - to finance their projects. This increased the banks' exposure to property developers, and there is past evidence to suggest that corporates are more likely to default, should the market turn bad, than households.

According to MAS data, as at end-June, housing and bridging loans as well as loans to the building and construction sector made up nearly half of the more than $200 billion loan portfolio of commercial banks here. This has been a steady increase from the 33 per cent from about a decade ago, around the height of the last property boom. In absolute terms, housing and bridging loans were worth some $64 billion in June, compared with about $63 billion six months ago. As the Monetary Authority of Singapore had also previously said, the use of the deferred payment scheme by property developers introduces additional risks to the developers (and to the banks which finance these developers) because property purchasers under this scheme are not subject to credit checks by developers.

'This is unlike property purchasers who apply for housing loans and are subject to credit assessment by banks. MAS expects banks to exercise prudence in their financing to the property developers and be fully cognisant of the additional risks from the use of deferred payment schemes,' MAS had said then. The removal of the scheme will restore some balance, and the banks should have their exposure to households raised while lessening their exposure to developers.

The government's removal of the deferred payment scheme - and expectations of further cooling measures - could keep the property market cautious in the near term. Buyers may adopt a wait-and-see approach, and new projects could see a slower take-up rate. That could crimp home loans growth in the short term. But in the longer term, doing away with deferred payment will put home financing on a far healthier plane. 'Flippers' who buy property to resell quickly to make a fast buck will be deterred, the speculative froth will be taken out of the market, and pricing will come to levels more in line with economic fundamentals. For banks, this means genuine homebuyers and investors as customers - and that cannot be a bad thing.