Loopholes now closed

Ban on interest schemes, return of confirmed land sale list to avert danger of bubble

IN THE past year especially, developers have been dangling these as carrots for property hunters - two schemes that got around the Government prohibition on deferred payment, first by allowing buyers to make interest-only payments on a mortgage loan for a period, and then by having developers absorb those initial interest payments until the project was completed.

The nett effect? Buyers forked out either much lower instalments in those first few years or even none at all. This was a situation that provided a fillip for "flippers" and investors, ironically after the Deferred Payment Scheme was scrapped in late 2007 to curb overactive speculation.

But the loopholes have now been closed.

With immediate effect, interest absorption schemes (IAS) and interest-only housing loans (IOL) are banned, as the Government yesterday took steps to curb excessive price swings in the property market.

A second change, which had been signalled for some time, involves the reinstatement of the confirmed list of the Government Land Sales programme in the first half of 2010.

Property-related assistance measures in the Government's Budget - such as allowing a one-year extension of project completion period and letting developers rent out unsold residential units for up to four years - will also not be extended after they expire within the next two years.

Said National Development Minister Mah Bow Tan, announcing these measures in Parliament: "It is in everyone's interest to have a steady property market where prices move stably in line with economic fundamentals. If excessive speculation develops and a property bubble forms, eventually a severe correction must take place. This will have serious consequences for the economy, for the property market and for property owners."

The ban on the two interest schemes does not impact recent projects on which developers have already offered the IAS; they can continue to do so. Also exempt are housing loans restructured to IOLs for borrowers in genuine hardship.

Of the three anti-speculative measures, it is this prohibition that is generating the most buzz - but how much of a real impact will it have?

It won't cause a drastic drop in demand or prices, analysts predict.

In spite of the fact that the majority of property launches of late offered the IAS, the take-up among buyers has been just 20 to 25 per cent, according to a sample survey by the Urban Redevelopment Authority of recently-launched projects.

This concurs with what industry players observe. "In the recent launch of Trevista, for example, 80 per cent of the buyers opted for progress payment and only 20 per cent for IAS," said ERA's associate director Eugene Lim.

The reason? Buyers using interest-only schemes must fork out 2 to 5 per cent more in total, than with standard payments.

At least one development, Vista Residences, a freehold condominium at Balestier, was launched without the IAS option.

Those like Mr Brandon Lee, DMG and Partners Securities analyst, concur that the return of the Government's confirmed land sale list would have a bigger moderating impact.

"There are new sites thrown in, which has a direct impact on dampening prices," he said.



Medium-, long-term buyers won't be affected

As hoped for, it is speculators with limited resources and looking for an early cash-out, who would feel the brunt of the ban.

But also affected would be cash-poor home-hunters, especially those "who only have sufficient funds for the upfront downpayment of 20 per cent, (and) would now have to hold back on their buying decision for newly-launched projects", said Mr Li Hiaw Ho, CBRE Research's executive director.

They may, instead, have to look at projects close to completion because they would have to sell their existing home to finance the new purchase, he said.

For those serious buyers looking for a property for the long-term, analysts say that the steps are definite good news, taken as they were before a bubble started forming and speculation pushed prices up to "unnatural levels".

Nevertheless, prices will continue to rise, Mr Li said. "Despite these measures, residential home prices and sales volume will continue to improve; only now the pace of increase would be moderated to more sustainable levels with less volatility."

One consumer who is glad is Mr Kelvin Lee, 25, who is looking to buy a condominium as a long-term investment without any IAS help. He recently quelled his househunting as asking prices got too high. "Hopefully, these measures will block out the speculators and flippers and the market will cool off," he said.

Source: Today, 15 Sep 2009