Published November 6, 2008


Credit checks cut risks if deferred payments return

DPS has potential to create local version of sub-prime crisis, analysts caution


(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.

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.

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.'

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.

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.

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.

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.