Don't Be In A Hurry To Reinstate DPS

Source : The Business Times, December 27, 2008

Uncertainty in the market being caused now by the scheme should not be treated lightly.

THE deferred payment scheme (DPS) was scrapped over a year ago but it has left a lingering uncertainty in the market that may not clear for some time yet - a fact that should not be taken lightly in examining the merits of reviving the scheme, as some developers are urging the authorities to.

Developers say bringing back DPS will stimulate property demand and point out the scheme did help genuine home buyers tide over temporary cashflow issues.

However, DPS has also been blamed for creating excesses during the recent property bull run. It fuelled speculative buying, since buyers needed to pay only 10-20 per cent of a property's purchase price to the developer, with the rest only upon the project's completion.

Amidst the current property slump, DPS has also created a 'time bomb' that is ticking away as projects sold on the scheme near completion, which is when buyers have to pay the chunk of their purchase price to the developer. Buyers who have not secured a housing loan yet may find it difficult to get one, with the current tight lending regime being practised by financial institutions.

Without a housing loan, these buyers may not be able to meet their payment to the developer to complete their purchase. This will have consequences.

The government recently revealed that 10,450 private homes sold in uncompleted projects were under DPS as at Nov 30, 2008 and has even given a breakdown of this figure by location and expected year of completion. Of course, not all DPS buyers are speculators. Nevertheless, the debate continues to rage on how big an impact there will be on Singapore's property market from buyers failing to complete their purchase when projects receive Temporary Occupation Permit (TOP).

Predicting the size of the blast from the DPS 'time bomb' is tricky.

For one thing, no one knows how many of these buyers who purchased on DPS have already secured a housing loan. For those who have, paying that big instalment to the developer at TOP may not be an issue. Those without a loan may start to panic.

Other factors affecting the magnitude of the problem created by DPS include: how buyers are affected by the ongoing recession, prospects for their jobs or businesses, the economic and property market outlook at the time, and whether banks relent on their current tight lending policy.

So the impact of DPS is unclear. And the fate of buyers and developers remains uncertain.

Much has been said about DPS buyers defaulting on their purchases by walking away and returning units to developers. The reality is not so simple. The right to repudiate the sale-and-purchase agreement lies with the developer, not the buyer. Even so, some foreign buyers may get away with absconding from the deal and limiting their damage to the 10 or 20 per cent deposit paid.

However, local buyers who fail to complete their purchase risk being sued by developers to either complete the transaction or to compensate the developer for the shortfall between the original contracted purchase price and what the developer manages to sell the unit for later.

On the other hand, if buyers try to offload their units in a weak market, this may accelerate the tailspin in property prices. Another point to note is that those who sell their units at a loss in the subsale or secondary market will still have to cough up the difference and pay the developer.

For instance, if a buyer had picked up a $1 million property on DPS, has paid the developer a 20 per cent or $200,000 deposit and manages to sell his property to another buyer for say, $700,000 in the downmarket, the first buyer has to pay the developer the $100,000 shortfall before it agrees to transfer the title to the second buyer.

Developers too will have to count the cost of this whole episode, including the damage to their image if they drag financially strapped buyers to court.

The global financial crash has already dealt a big blow to sentiment in the Singapore property market. This is being exacerbated by the uncertainty over the likely fallout from DPS.

Defusing the time bomb

What can be done to defuse this time bomb? If buyers say they can't secure housing loans or sufficient loan quantums from banks to complete their purchase of properties bought on DPS, some of the stronger developers may be game to provide second mortgages for buyers - if the authorities allow that.

Alternatively, developers could record the outstanding payments from problem DPS buyers as debt owed to them. So these buyers become debtors to the developers, who may charge them interest on the unpaid amount until the sum is settled by buyers, as allowed under the sale-and-purchase agreement. Developers may, however, be deluged with buyers taking refuge in such arrangements. And these arrangements can only be made with the support of the developers' banks. Already, many mid-sized and smaller developers are highly geared.

Whichever way you look at it, somebody will have to pay the price for the problems created by DPS - be it buyers having to sell their units at a loss or being sued by the developer, or developers ending up financing buyers to help them complete their purchase.

Sentiment is so weak now that reviving DPS alone probably won't do the trick in jumpstarting private home sales.

Banks are tight-fisted now, but it is a matter of time before they have to relax on home mortgages. The business of financing will then be best left to them. In the months gone by, some banks had even devised novel schemes like zero instalment and interest absorption that mimicked DPS - and served the needs of genuine home buyers with temporary cashflow problems, just as well as DPS did.

The good thing about this approach is that banks will have to do checks on borrowers to ensure they are credit worthy - to minimise the risk of non-performing loans manifesting later from giving loans to poor-quality borrowers dabbling in properties beyond their means.

Developers, on the other hand, are not in the business of assessing the creditworthiness of potential buyers. Their business is to sell homes - to as many people as possible and at as high a price as possible. If developers are again allowed to offer DPS in its old form to home buyers, it may once more draw speculators with weak credit standing and create another round of excesses.

Some have suggested ways to temper DPS. For example, buyers could be required to pay an additional 10 per cent - say 18 months after they have paid the initial 20 per cent to the developer. The idea is that buyers would need to apply for and draw down a housing loan, bringing banks into the picture earlier. That may help to sift out financially weaker speculators.

DPS helps HDB upgraders to buy private property, as they don't have to sell their existing HDB flats immediately to make progress payments on their new home. But the problems being caused by DPS should not be treated lightly amidst calls to reinstate the scheme.

The Singapore property market will eventually recover after the dust from the global financial crash settles and the Remaking Singapore Story takes centre stage once again. In future, high-net worth individuals from overseas and other investors looking for places to park their monies may develop a distate for places brimming with excesses. After all, buying a property is a long-term commitment, best made within one's means.