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Thread: Do deferred payments fuel speculation?

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    Default Do deferred payments fuel speculation?

    Feb 2, 2007


    Do deferred payments fuel speculation?

    By Chua Hak Bin & Lim Jit Soon

    THE deferred payment scheme is probably one of the most popular and creative products to hit the Singapore residential property market.

    One large property developer indicated that more than 90 per cent of its buyers have opted for deferred rather than progressive payment for the Marina and downtown projects.

    In non-Marina projects, deferred schemes accounted for fewer but still more than half of buyers.

    Is the deferred payment scheme a healthy development or will it fuel a speculative fever?

    The scheme allows the buyer to fork out only a 10 or 20 per cent down payment on the property purchase price, with the rest due on completion, usually three years later.

    This increases the attractiveness and affordability of a property, as the buyer need not worry about further payments during the construction phase.

    Moreover, this ample period of three years allows the buyer time to resell the property for a profit if prices rise.

    Returns on capital can be substantial because of the implicit leverage: a 20 per cent increase in property value, for example, generates a 100 per cent return on the initial capital outlay.

    The popularity and prevalence of the deferred payment scheme may already have some impact on the overall financial system, including explaining some of the puzzling trends.

    First, the deferred payment scheme has put off the need for buyers to finance their purchases. The burden of financing has instead shifted from households to property developers and construction companies.

    This explains why mortgage growth has been running at a tepid pace of about 2 per cent, despite the booming high-end property market.

    In contrast, building and construction loans have surged over the past year, rising 19.3 per cent as of November last year.

    Property developers, because of their strong cash positions and balance sheets, have also been able to take on this financing.

    The concern here is that buyers may be taking on more than they can chew, even though current mortgage growth data does not reflect any alarming jump in leverage.

    But the prevalence of the deferred payment scheme suggests the mortgage surge will come eventually.

    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.

    We estimate that mortgages could surge $5 billion next year and $11 billion in 2009, based on completed properties of 8,849 and 18,447 coming online respectively.

    This represents about 8per cent and 17.5 per cent of the current $63 billion of outstanding mortgages as at end-November last year.

    This is a big jump given that mortgages are currently growing at only about 2 per cent.

    But these estimates are still modest compared to the early 1990s property boom when mortgage growth was in the magnitude of about 30 per cent.

    Second, the deferred payment scheme may encourage the entry of speculators and fuel stronger price increases in the primary residential market.

    The latest Urban Redevelopment Authority report showed that the number of sub-sale transactions has been soaring over the past two years. Sub-sales reached 426 in the fourth quarter of last year and accounted for 5.4 per cent of total transactions.

    The number of sub-sale transactions is now quadruple the figure two years back, suggesting an increasing number of 'flippers' or speculators.

    But again, the current ratio of sub-sales is still significantly less than in the property boom of the 1990s, when sub-sales accounted for as much as 22 per cent of transactions in 1995-1996.

    The deferred payment scheme has also made new projects more attractive to speculators, compared to completed properties.

    Median prices of uncompleted projects have risen by about 20 per cent from their recent lows, double the 10 per cent for completed projects.

    This divergent price behaviour could mean heavy speculative activity is artificially bidding up prices of new projects, fuelled by deferred payment schemes.

    A sharp price correction may occur when these projects are completed as payment comes due and speculators are unable to offload.

    A more difficult question is whether policymakers should be concerned and intervene. After all, froth and speculation exist in markets all the time, whether in stocks, commodities or properties.

    Differentiating fundamental investment from speculation is not straightforward. Moreover, the current property market boom appears to be confined to the high end and has not broadened out to the mass residential or HDB market in a definite fashion.

    Our projections may be flawed if many buyers are able and willing to take up their purchases, simply because they come from the affluent segment. Mortgage debt in such an event will not likely surge and may remain soft.

    It probably boils down to degree. The overall weight of the evidence does not, as yet, suggest excess speculation if comparisons with the early 1990s property boom are any guide.

    There are, after all, fundamental factors currently supporting the property boom, including a large influx of foreigners and the integrated resorts.

    Citigroup property analyst Wendy Koh remains bullish. But it is also worth highlighting that genuine buyers should be aware of the risks and do their sums accordingly.

    Clearly, some portion of the current property boom, especially in the high end, is fuelled by easy-payment deferred schemes, with the risk of a bad ending somewhere down the line.

    Chua Hak Bin is Asian Economist and Lim Jit Soon is Singapore Equity Market Strategist at Citigroup.

  2. #2
    Unregistered Guest

    Thumbs down Re: Do deferred payments fuel speculation?

    If the true fundmentals are good and economy so booming and foreigners are so rich , then why continue the deffered payment scheme ???? haha . Think about it .

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