Thursday, November 6, 2008

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DPS can create Singapore sub-prime crisis, analysts caution

Some developers hopeful that the government will reintroduce DPS


(SINGAPORE) When Ministry of National Development announced last week that it was suspending sales of state land through the confirmed list till June next year, jubilant developers lauded the swiftness of the government action that will hopefully stem the poor sentiment in the property market.

Some developers were also hopeful that the government will reintroduce the Deferred Payment Scheme (DPS), which was scrapped in October last year to deter speculation.

Under DPS, home buyers had to pay only 10 per cent, or more typically 20 per cent, of the price of the residential property they bought from developers.

The next payment would be made when the project was completed, perhaps two to three years down the road. Very often, buyers could make the 10-20 per cent initial downpayment using cash and CPF savings, without having to commit to a bank loan, which could be delayed till the project was closer to completion, when the bulk of the purchase price had to be paid to the developer.

Under a normal progress payment scheme, buyers have to secure a housing loan much sooner, as they are billed by the developer in stages, according to the progress of the project's construction.

When DPS was scrapped in October 2007, many industry watchers said it had come too late as sentiment in the Singapore property market had already started to soften with the onset of the US sub-prime crisis.

Property Agents said Restoring DPS will bring back Foreign Buyers


And now, most property agents agree that restoring the scheme will help bring some buyers back into the market, especially foreign buyers - although not in as great a number as during the height of property fever in early 2007.

The head of a big property consulting group estimated that in some instances, up to 70 per cent of foreign buyers in luxury residential projects bought on deferred payment schemes in 2006-2007.

Buyers have to pay up to 5 per cent more under the DPS compared with the normal progress payment scheme. Yet the ease of making a small initial downpayment made buying attractive for speculators eyeing huge gains from disposing of their properties before the projects were completed.

DPS Restoration may create Singapore's Sub-prime crisis


However, other market watchers and analysts say a restoration of DPS could potentially create Singapore's own version of a sub-prime crisis.

When home buyers purchase a property on DPS, without committing to any bank loan, there is no credit assessment done to see if they have the means to complete the purchase. So this scheme could draw less credit-worthy buyers who may have difficulty securing housing loans later when it is time to pay up.

If substantial numbers of buyers default and return their units to the developer, the banks that had extended loans to the developers may not be too happy.

'The land loan and construction loan may be required to be priced differently because the risk has increased,' as Savills Singapore's director of marketing and business development Ku Swee Yong puts it.

Agreeing, the head of the major property consulting group said: 'There will be implications for banks' exposure to property loans extended to developers, and that was probably a major reason the authorities considered in scrapping DPS in the first instance.'

Ku Swee Young: DPS is helpful to genuine home buyers


To be sure, DPS is helpful to genuine home buyers. For instance, an HDB upgrader who buys a private home under construction would prefer to sell his existing HDB flat only when the private condo he's moving into has been completed; so DPS helps him to tide over until then, says Mr Ku.

DPS has a tendency to draw speculators


But market watchers point out that DPS - because it does not entail credit checks - also has a tendency to draw speculators. 'There's a penchant for optimism, especially among the young. Whereas if you take a housing loan, you will be psychologically more aware of your financial obligations and tend to be more careful,' says a property veteran.

Ku Swee Yong: DPS could be reincarnated but with modifications


To cut this risk of fuelling speculation, the DPS could be reincarnated but with modifications, suggests Savills' Mr Ku. For one, home buyers making a purchase under the DPS could be required to sign up for a housing loan first, even if they need to make a drawdown only a few years later. 'That way, the credit assessment is done upfront. And secondly, such home buyers will have to pay a penalty to the bank in the form of an admin charge of $3,000 to $6,000 if they decide to sell their property before the project is completed and not use the home loan or if they make an early repayment,' Mr Ku says.

Another way to reduce the negative effects of DPS is to raise the initial payment from 10-20 per cent previously to 30 per cent, Mr Ku suggests. 'That way, the developer would have collected more equity and that will provide a bigger cushion to protect the developer as well as its banks in the event of a default by buyers not able to hold on to their units,' he adds.

Another view: Leave banks to offer innovative housing loans to home buyers


Then there's another view. The government should continue to keep DPS at bay and instead leave banks to offer innovative housing loans to home buyers that replicate the benefits of DPS - if it makes commercial sense to them. The interest absorption and zero instalment schemes offered by some banks highlighted in a BT article in September allow buyers to make a 20 per cent downpayment and then nothing until the project is completed.

Under such schemes, buyers have to sign up for a bank loan for the property, thus entailing a credit-worthiness check to ensure they are not dabbling in properties beyond their means. Afterall, nobody wants a sub-prime crisis here.

May also want to read:
Fire Sale: Owners Dump Condos
The days of Cheap, Easy Credits chasing after property is OVER!
When the bubble of greed and fear burst, guess who suffer?
Property Investment Tip: Don't put all your eggs in one basket
HDB Resales: West Sees Highest Price Increase

4 comments:

Anonymous said...

why do these property agents and developers go on and on trying to bring back the DPS for their own selfish reason ... DPS is Spore's version of US subprime mortgage .. have we not learned anything .. why do we want home-buyers to buy with DPS with or without modifications? except to make those people rich .. home-buyers should be cautioned to buy within their means .. in fact government should increase the amount of downpayment just like what they've suggested for US

Anonymous said...

DPS or altered in some form with a new name is a recipe for disaster and fuming property speculations again. Of course, the developers and speculators are in jubilations with recent government plan to halt sales of land and prospect of more proactive measures to improve market sentiment. We urge the Singapore government be more sensitive to plights of aspring genuine Singaporean home buyers. stop taking more measures to help the developers and speculators. Why is our government seems to be always and strongly supporting the developers ? On the contrary, the government should bar speculators from buying more than one unit, especially the foreigners and should enforce capital gain tax like other countries. These developers are hoarding land, cash and enriching themselves for speculative and unproductive purposes. Look at some of the developers or big speculators, their balance sheets, dividends declarations in the past, remunerations, they have it too good. Some can afford to own and rent the whole or part of the block, hoarding land and units with strong holding power even now privately through some nominess. STOP helping the developers and rich speculators. We have limited land and rooms for speculations and profiteering in small and vulnerable city like Singapore.

Anonymous said...

The small decline of private property prices in Singapore do not warrant any Government stimulative measures to support the developers. It is worst if one reinstate the DPS. It is an accepted fact there the vast majority of property sellers even now, are still reaping handsome capital gain (tax free). The recent government plan to halt land sales or any impending measures to stimulate positive sentiments are rather strange and can only benefit the speculators and developers further.

Anonymous said...

just want to share this article:

Be prudent about credit risks
Restoring property deferred payment schemes may not help the recession



Gan Peng Hoei:


.
.
I refer to “When ‘Buy now, pay later’ makes sense” (Nov 7).
.
The article seems to pass the wrong message about prudent risk management.
.
Any deferred payment scheme would shift the initial onus of financing the project to the developer. This makes sense only if the developer can either fund the project or find a financial institution or investors willing to do so. With the credit crunch, that is not a sure bet so that actually increases the likelihood of the developer going into bankruptcy if they resume deferred payments. The net result is not high property prices but a property meltdown as fire sales will become the norm.
.
The new owner on the other hand, usually pays a lumpsum only when the Temporary Occupancy Permit is obtained.
.
That means that they have time to source for financing. Again, we have to assume that the new owners have the ability to pay the full amount themselves or get a loan. In both these assumption, we are talking about credit risk. Credit risk is the risk of a borrower defaulting on their loan.
.
With poor Singapore economic numbers and retrenchment forecasted, it is likely that the credit risk on borrowers (i.e. new homeowners) will increase so they are more likely to default, irrespectively of the value of their purchased property. The larger the loan, the greater the probability of borrower default. A high property value becomes a moot point only if there are willing buyers.
.
Developers, notwithstanding, have been funding their projects and needs to recover development costs. They too face increased credit risk in an economic slowdown since the underlying collateral value (the land on which the project is built) tends to decline in value. The writer may wish to verify this by examining the number of land parcels withdrawn by the government this year due to a lack of interest.
.
Needless to say, if an investor or speculator is so optimistic about the property market and is a qualified borrower, he does not need a deferred payment scheme as motivation to buy. He already has the financial means and coming back to my previous point, would be a willing buyer even now, at lower prices. Therefore deferred payment is really attractive for unqualified borrowers who lack the financial means.
.
In summary, the bottom line is that deferred payment schemes offer unqualified borrowers (those who cannot afford the lumpsum loan) an opportunity to buy beyond their means and create a situation where property developers will use the sales generated by such borrowers to get bank financing to develop projects. In the meantime, prudent credit risk management is conveniently ignored by all parties. The end result is possibly the greatest economic depression in this century.
.
That is exactly the cause of the current economic slowdown which started in the US housing sector because unqualified borrowers were able to buy houses (at high prices) that they could not afford in the first place.
.
A review of the underlying risks would thus be enlightening. Understandably, risk management is neither an easy nor a nice topic to write about, but it is worthwhile. It may “save” many people from falling into a debt trap.
.
.
The writer is an ex-risk manager nowmanaging his own private equity.
Restoring property deferred payment schemes may not help the recession


Gan Peng Hoei:


.
.
I refer to “When ‘Buy now, pay later’ makes sense” (Nov 7).
.
The article seems to pass the wrong message about prudent risk management.
.
Any deferred payment scheme would shift the initial onus of financing the project to the developer. This makes sense only if the developer can either fund the project or find a financial institution or investors willing to do so. With the credit crunch, that is not a sure bet so that actually increases the likelihood of the developer going into bankruptcy if they resume deferred payments. The net result is not high property prices but a property meltdown as fire sales will become the norm.
.
The new owner on the other hand, usually pays a lumpsum only when the Temporary Occupancy Permit is obtained.
.
That means that they have time to source for financing. Again, we have to assume that the new owners have the ability to pay the full amount themselves or get a loan. In both these assumption, we are talking about credit risk. Credit risk is the risk of a borrower defaulting on their loan.
.
With poor Singapore economic numbers and retrenchment forecasted, it is likely that the credit risk on borrowers (i.e. new homeowners) will increase so they are more likely to default, irrespectively of the value of their purchased property. The larger the loan, the greater the probability of borrower default. A high property value becomes a moot point only if there are willing buyers.
.
Developers, notwithstanding, have been funding their projects and needs to recover development costs. They too face increased credit risk in an economic slowdown since the underlying collateral value (the land on which the project is built) tends to decline in value. The writer may wish to verify this by examining the number of land parcels withdrawn by the government this year due to a lack of interest.
.
Needless to say, if an investor or speculator is so optimistic about the property market and is a qualified borrower, he does not need a deferred payment scheme as motivation to buy. He already has the financial means and coming back to my previous point, would be a willing buyer even now, at lower prices. Therefore deferred payment is really attractive for unqualified borrowers who lack the financial means.
.
In summary, the bottom line is that deferred payment schemes offer unqualified borrowers (those who cannot afford the lumpsum loan) an opportunity to buy beyond their means and create a situation where property developers will use the sales generated by such borrowers to get bank financing to develop projects. In the meantime, prudent credit risk management is conveniently ignored by all parties. The end result is possibly the greatest economic depression in this century.
.
That is exactly the cause of the current economic slowdown which started in the US housing sector because unqualified borrowers were able to buy houses (at high prices) that they could not afford in the first place.
.
A review of the underlying risks would thus be enlightening. Understandably, risk management is neither an easy nor a nice topic to write about, but it is worthwhile. It may “save” many people from falling into a debt trap.
.
.
The writer is an ex-risk manager nowmanaging his own private equity.

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The blogger here has been affectionately named by close allies as "Smart Buyer" but really, he's not smart. Smart Buyer just believes that being prudent is smart. That's the essence of the message of this blog and Smart Buyer hopes it'll benefit other property buyers.

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