Tuesday, October 27, 2009

Curbing price hikes

Increase down payment ratio

IN ITS bid to cool the rapid rise in property prices, Hong Kong increased the down payment ratio to 40 per cent for properties above HK$20 million (S$3.6 million). For those priced below HK$20 million, the maximum loan of HK$12 million applies.

Although the increase in down payment affects mainly the high-end segment of Hong Kong's property market, it illustrates two points. One, the down payment ratio of property purchases in Hong Kong seems to be at least 10 percentage points higher than Singapore's. Two, an increase in down payment ratio is the most effective measure to curb property price increases in Singapore as a direct demand-side measure.

After all, an increase in down payment ratio was adopted in the late 1990s in Singapore, which led to a relatively steep decline in property prices. However, currently, assuming a loan-to-value ratio of 80 per cent requirement typical of most banks, only 5 per cent cash is necessary. The remaining 15 per cent is settled by the buyer's CPF.

In today's global village, policy measures must not be evaluated in isolation. In addition, 'hot money' may soon flow into Singapore via investments in the property sector, due to the relatively low barriers of entry here and a mere 20 per cent cash down payment, hence pushing property prices in the Republic even higher.

What will the Government do to cool the property sector, in view of the similarly strong increase in property prices in the third quarter? Will there be an increase in the down payment ratio and if not, why?

Source, Straits Times 27 October 2009

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