mr funny
12-04-07, 04:55
Published April 12, 2007
Homes: concern over deferred payment plans
Fears that such schemes are shifting financing burden from households to developers and builders
By SIOW LI SEN
(SINGAPORE) Deferred payment schemes - said to be one of the factors fuelling the local property market - are drawing the attention of the Monetary Authority of Singapore (MAS).
Such schemes are so popular with buyers that while the property market is red hot, it has not translated into healthy home loans growth.
Instead, deferred payment schemes have shifted the burden of financing to developers and construction companies, and away from households. The schemes also encourage speculators to buy property they have no intention of hanging on to.
And MAS is taking notice. Some bankers say it has been raising questions about banks' exposure to deferred payment schemes.
'MAS recognises that such deferred payment schemes may pose additional risks to the developer and its bank, and expects banks which finance such property developers to take this into account in their management of exposure to the developer,' an MAS spokeswoman said in response to BT queries.
According to MAS data on bank loans, building and construction loan growth rose a sizzling 18.1 per cent in February, following a 19 per cent gain in January. But home loans grew only 2.7 per cent in February and 2.1 per cent in January.
Among the local banks, OCBC and DBS grew their building and construction loans 27 per cent and 21 per cent respectively in 2006. UOB increased its building and construction loans 4 per cent.
OCBC spokeswoman Koh Ching Ching said the increase was due mainly to new drawdowns and loans to finance property development in Singapore, Malaysia and Greater China, with Singapore accounting for the bulk.
'OCBC has a traditional strength in real estate financing,' said Ms Koh. 'We have dedicated real estate departments within our business banking division for both large and small and medium real estate companies.
'The property sector is an important part of the Singapore economy and there are regulatory as well as internal guidelines to ensure that our exposure to this sector does not exceed certain limits.'
Citigroup economist Chua Hak Bin said deferred payment schemes have become prevalent in the local property market, accounting for more than 90 per cent of transactions at recent new Marina and downtown projects.
And he feels there is growing concern that this may be fuelling speculation and eventually will have a material impact on system-wide banking loans.
'Price increases in new home sales which offer deferred payment hit much higher levels,' Dr Chua said. This is because buyers on such schemes have time to flip or resell the property for a profit.
'The returns on capital can be substantial because of the implicit leverage,' he said. 'A 20 per cent increase in property value, for example, generates a 100 per cent return on the initial capital outlay.'
Deferred payment schemes that allow buyers to fork out only a 10-20 per cent downpayment, with the balance due on completion usually three years later, are not new. They were introduced in the early 1990s and offered again in the early 2000s. 'But it wasn't prevalent then,' Dr Chua said.
Not all developers offer deferred payment schemes. And some banks say overall progressive payment schemes are still more popular. This could be due to the higher cost of a property of at least 2-3 per cent if deferred payment is offered.
UOB head of loans Kevin Lam said: 'Progressive payment borrowers, while more, are not significantly more, than deferred payment borrowers.'
But an HSBC spokeswoman said that among its customers who have bought properties under construction, 60 per cent have opted for deferred payment schemes while 40 per cent have chosen progressive payment schemes.
Citibank business director Tan Chia Seng said: 'For those properties where deferred payment schemes are made available, we have seen an increase in interest from home buyers. 'The nature of the deferred payment scheme generally makes new projects more attractive to investors. However, home buyers who intend to occupy the properties may be interested in deferred payment schemes as well if the property they purchase is priced at an imputed interest rate lower than the home loan rate.'
Dr Chua warns though that buyers may be biting off more than they can chew, especially if the market tanks or the economy falters. The prevalence of deferred payment schemes suggests a mortgage surge will come eventually, he said. 'The day of reckoning will likely occur in 2009 when completions are expected to soar to 18,447 - more than double the typical annual supply.'
Maybank's head of consumer banking Helen Neo said deferred payment loans are more risky.
'Yes, as repayment only starts from TOP (temporary occupation permit),' she said. 'There could be changes in the borrower's income prior to TOP.'
Homes: concern over deferred payment plans
Fears that such schemes are shifting financing burden from households to developers and builders
By SIOW LI SEN
(SINGAPORE) Deferred payment schemes - said to be one of the factors fuelling the local property market - are drawing the attention of the Monetary Authority of Singapore (MAS).
Such schemes are so popular with buyers that while the property market is red hot, it has not translated into healthy home loans growth.
Instead, deferred payment schemes have shifted the burden of financing to developers and construction companies, and away from households. The schemes also encourage speculators to buy property they have no intention of hanging on to.
And MAS is taking notice. Some bankers say it has been raising questions about banks' exposure to deferred payment schemes.
'MAS recognises that such deferred payment schemes may pose additional risks to the developer and its bank, and expects banks which finance such property developers to take this into account in their management of exposure to the developer,' an MAS spokeswoman said in response to BT queries.
According to MAS data on bank loans, building and construction loan growth rose a sizzling 18.1 per cent in February, following a 19 per cent gain in January. But home loans grew only 2.7 per cent in February and 2.1 per cent in January.
Among the local banks, OCBC and DBS grew their building and construction loans 27 per cent and 21 per cent respectively in 2006. UOB increased its building and construction loans 4 per cent.
OCBC spokeswoman Koh Ching Ching said the increase was due mainly to new drawdowns and loans to finance property development in Singapore, Malaysia and Greater China, with Singapore accounting for the bulk.
'OCBC has a traditional strength in real estate financing,' said Ms Koh. 'We have dedicated real estate departments within our business banking division for both large and small and medium real estate companies.
'The property sector is an important part of the Singapore economy and there are regulatory as well as internal guidelines to ensure that our exposure to this sector does not exceed certain limits.'
Citigroup economist Chua Hak Bin said deferred payment schemes have become prevalent in the local property market, accounting for more than 90 per cent of transactions at recent new Marina and downtown projects.
And he feels there is growing concern that this may be fuelling speculation and eventually will have a material impact on system-wide banking loans.
'Price increases in new home sales which offer deferred payment hit much higher levels,' Dr Chua said. This is because buyers on such schemes have time to flip or resell the property for a profit.
'The returns on capital can be substantial because of the implicit leverage,' he said. 'A 20 per cent increase in property value, for example, generates a 100 per cent return on the initial capital outlay.'
Deferred payment schemes that allow buyers to fork out only a 10-20 per cent downpayment, with the balance due on completion usually three years later, are not new. They were introduced in the early 1990s and offered again in the early 2000s. 'But it wasn't prevalent then,' Dr Chua said.
Not all developers offer deferred payment schemes. And some banks say overall progressive payment schemes are still more popular. This could be due to the higher cost of a property of at least 2-3 per cent if deferred payment is offered.
UOB head of loans Kevin Lam said: 'Progressive payment borrowers, while more, are not significantly more, than deferred payment borrowers.'
But an HSBC spokeswoman said that among its customers who have bought properties under construction, 60 per cent have opted for deferred payment schemes while 40 per cent have chosen progressive payment schemes.
Citibank business director Tan Chia Seng said: 'For those properties where deferred payment schemes are made available, we have seen an increase in interest from home buyers. 'The nature of the deferred payment scheme generally makes new projects more attractive to investors. However, home buyers who intend to occupy the properties may be interested in deferred payment schemes as well if the property they purchase is priced at an imputed interest rate lower than the home loan rate.'
Dr Chua warns though that buyers may be biting off more than they can chew, especially if the market tanks or the economy falters. The prevalence of deferred payment schemes suggests a mortgage surge will come eventually, he said. 'The day of reckoning will likely occur in 2009 when completions are expected to soar to 18,447 - more than double the typical annual supply.'
Maybank's head of consumer banking Helen Neo said deferred payment loans are more risky.
'Yes, as repayment only starts from TOP (temporary occupation permit),' she said. 'There could be changes in the borrower's income prior to TOP.'