Published September 15, 2009

Removing IAS crutch sends strong signal, observers say

Move clearly aims to deflate speculative property bubble


(SINGAPORE) Measures announced in Parliament yesterday to cool down the private residential property market are expected to reduce home sales and dampen rising prices.

In particular, the Monetary Authority of Singapore's (MAS) statement that it will disallow the interest absorption scheme (IAS) and interest-only housing loans (IOL) with immediate effect are clearly meant to deflate the speculative bubble forming in the private residential property market, analysts said.

But right now, it is unclear how much of an impact on demand these steps will have.

Developers, on their part, yesterday said that they will go ahead with planned launches. 'The IAS was offered when the property market was facing challenging economic conditions during the global financial meltdown,' said industry body Real Estate Developers' Association of Singapore (Redas). 'This change is unlikely to have any significant impact on developers' future launches.'

A sample survey of recently launched projects by the Urban Redevelopment Authority (URA) showed that the take-up rate of the IAS was about 20-25 per cent. But the percentage varies widely from project to project.

While home buyers were quick to take up the IAS when the market first started on its rebound in Q1 2009, interest in the scheme has been on the wane in recent months as developers have increased the premium that buyers have to pay when they opt for the scheme. Earlier this year, when the IAS first took off in popularity, properties offered under the scheme were priced some 2-3 per cent higher than those sold under the normal progressive payment scheme. But in recent months, developers have increased the premium to as much as 5 per cent.

'In recent months, home buyers have become more discerning as most developers offer a choice - that is, to purchase with or without the IAS,' said Gregory Chan, head of consumer secured lending at OCBC Bank. 'For properties purchased under IAS, the purchase price may be at a premium of at least 2 per cent compared to a purchase under the normal progressive payment scheme.'

Echoed United Overseas Bank's head of loans division Chia Siew Cheng: 'While the take-up rate for IAS is good, our normal progressive home loan packages are actually more attractive and popular with home buyers.'

Ho Bee Investment executive director Ong Chong Hua argued that the impact of removing the IAS could be more psychological than real. 'The thing to note is that whether one buys on IAS or normal progressive payment scheme now, the buyer would have to lock in financing at the point of purchase. This is very different from the old Deferred Payment Scheme where up to 90 per cent of buyers did not get bank loans when they bought a property - potentially creating a situation where they may not be able to complete their purchase if the market crashed,' he said.

Jones Lang LaSalle's head of research for South-east Asia Chua Yang Liang pointed out that the removal of the IAS and IOL 'still does not address the larger fundamental issue of low interest environment that could have a stronger driving force on the recent buying surge'.

However, disallowing the IAS and IOL does have the immediate effect of cooling sentiment and removing inflated demand.

The announcements yesterday signal 'that the authorities are adopting an incremental approach at deflating house price expectations, with more curbs in the pipeline, should speculative activity continue to persist', said Leong Wai Ho, senior regional economist at Barclays.

'Coupled with the sizeable pipeline of residential units that are planned or under construction, the expected increase in vacancy rates over the next two years, especially in the high-end condominium market, suggests that the risks for property prices and rents are firmly tilted to the downside,' he added.

Under the IAS and IOL schemes, a property purchaser will not have to make any significant payment, apart from the upfront 10-20 per cent downpayment, until the housing project is completed. These schemes are thought to encourage property speculation in a buoyant market where prices are rising rapidly.