Deferred Payment Scheme: Averting A Crisis

Source : The Straits Times, Dec 1, 2008

Act now to contain any fallout from property purchases worth billions of dollars

IN MANY ways, the credit crisis crippling vast tracts of the global financial system resembles a guerilla war.

It is fiendishly difficult to work out exactly who the enemy is or where he might be lurking.

It is deeply frustrating. Each time a financial firestorm is doused, another even more intense blaze erupts.

Although there seems to be no imminent end to the crisis, there are many useful lessons to be learned from the calamity so far.

Take Citigroup's recent painful experience, for example. The giant lender had to be saved from potential oblivion by a US government bailout after its share price collapsed, even though it was healthier than other global banks by many measures.

It is a sobering reminder that, in a climate of fear, it is wise to stay a few steps ahead of the crisis, keep tabs on possible flashpoints and defuse them before they become a full-blown crisis.

Until recently, Singapore had been in the fortunate position of having escaped much of the fallout from the crisis.

But since September, jobs have been lost and companies are struggling to rollover their loans. This came after the collapse of US investment bank Lehman Brothers sparked panic among banks, which then clamped down on lending activities.

The fallout has been felt most profoundly in the local property market where soaring prices last year attracted hordes of speculators snapping up condos in the hope of making a quick profit.

This sudden reversal has prompted analysts to raise concerns over possible systemic risks posed to banks from the downward spiral in property prices, given their big exposure to real estate loans.

Their biggest worry is focused on the record 14,811 private properties sold by developers to homebuyers last year.

Many of these flats were sold under a 'deferred payment scheme', introduced 10 years ago during the Asian financial crisis to help developers offload unsold properties and which was scrapped only in October last year.

This scheme enabled a homebuyer to pay only the stamp duty and 10 per cent of the purchase price upfront. The rest is paid only when the flat is given its temporary occupation licence (TOP).

At the height of the property market fever last year, the scheme was blamed for fuelling excessive speculation in sought-after condos because they could rapidly change hands several times as prices rose. All the speculator needed was the downpayment for the flat.

It is a completely different story now. By some measures, property prices have fallen back to the levels of last January. This means that many of last year's new property launches are now under water, and current prices are likely to be less than what buyers paid last year.

Awkward questions are being asked, such as what will happen to buyers on the deferred payment scheme when the condos are completed next year.

Will they simply walk away - writing off their deposits as a loss - and leave the nightmare of reselling the property to the developer? This would depress an already falling property market still further.

And how about those buyers who had the foresight to arrange a bank loan? Will the bank insist on doing a fresh valuation of the property and offer a smaller loan amount? What happens if the buyer cannot make up the difference?

Nobody in the market knows exactly how many of these units were purchased on the deferred payment scheme. And when the scheme potentially covered billions of dollars' worth of property purchases last year, it raises plenty of concerns.

In a climate of uncertainty, when even big banks can be rocked by a crisis of confidence, the guessing game played by analysts over the scale of this potential problem can easily spread fear among both banks and investors alike.

The Government has sensibly refrained from trying to talk up the property market. Instead it has stated openly that it cannot work against market forces and try to prop up prices artificially.

But it can get the various agencies to work together to produce a breakdown of the homebuyers on the deferred payment scheme - preferably by condo project - along with details of when the projects are likely to be completed.

This would enable all the interested parties - banks, developers and homebuyers - to make an informed decision on the seriousness of the problem and take measures to avert it.

It is very likely that the problem is not a big one and that the banks and developers have been scaring themselves unnecessarily.

Given the low interest rate environment, most genuine buyers may have already opted to make progressive payments as construction proceeds on their dream homes.

So long as they have a job and continue to service their monthly instalments promptly, they are still good credit risks, even though the value of their dream home may have fallen sharply.

But the manner in which the credit crisis has ambushed sound companies and brought them to their knees is scary.

Coming to grips with the deferred payment issue is an exercise worth doing. It will enable us to get ahead of the curve on the credit crisis for a change.