When ‘buy now, pay later’ makes sense

Source : Today - 7 Nov 2008

A case to restore deferred payment schemes during the recession?:

What a difference a year makes.

Just over 12 months ago, the economy and stock market were booming, prompting the Government to intervene to cool the heady property market.

Out went deferred payment schemes for homebuyers. A year on, and the economy is in recession, with the stock market tanking.

Scrapping deferred payment schemes was probably the right decision then.

But is it still right?

Perhaps it is now time for the Government to make another pre-emptive strike by permitting deferred payments again, to help prevent property prices from spiralling in the opposite direction.

As recession sinks in, unemployment will rise and rents will drop as the influx of expats slows. At the same time, there is about to be a flood of new housing, following last year’s en-bloc redevelopment frenzy.

The Government has already moved to limit state land sales. This is bound to help in the longer-term. A restoration of deferred payment schemes might have a more immediate impact.

It would allow people still confident about the mid- to longer-term prospects of Singapore’s housing market to commit to buying homes now, without having to take on the financial burden of paying instalments on a mortgage for another two to three years - by which time the economy can be expected to have bounced back.

Deferred payment schemes were first offered in the early 1990s and again in the early 2000s. Under such schemes, developers could offer buyers of uncompleted private properties the option to defer part of their payment.

For instance, buyers could pay an initial 20 per cent for units in a future development, with the remainder due when the project is completed, typically two to three years later.

Such buyers would typically pay 2-3 percent more for their properties for this privilege.But many found it a price worth paying.

For speculators or buy-to-rent investors, the returns on capital can be substantial in an upward market because of the implicit leverage. If you sell-on the unit before it is completed, a 20 per cent increase in property value, for example, generates a 100 per cent return on the initial capital outlay.

The downside is that such schemes encourage speculators to sign up for properties they have no intention of hanging on to.

During last year’s boom, this added to concerns of over-heating. Given the cool chill blowing over the global economy and markets right now, there’s less risk of deferred payment schemes doing that at present.

Urban Redevelopment Authority figures show that private home prices fell by an average 2.4 per cent in the third-quarter from the preceding quarter. However, most agents will tell you prices of top-end units have fallen by much more.

Over 31,000 housing units are already under construction, Credit Suisse estimated last month. Of these, the bank estimates that 15,000 are slated for completion by the end of next year. Citibank estimates closer to 18,500.

That’s huge. Typically just 6,600 new units are bought each year. However, expect some projects to be delayed.

In the property boom, deferred payment schemes shifted the burden of financing to developers and construction companies, and away from households.

It meant that during the recent housing boom, local banks enjoyed a surge in building and construction loans, but only saw modest growth in mortgage lending.

The flip side to this is that banks may now not see a sharp slowdown in mortgage lending in coming months as the property market cools. That’s because many homebuyers who bought using deferred payment schemes two or three years ago are about to knock on the banks’ doors for mortgages as their projects are completed.

Going forward, banks themselves could choose to tighten the lending strings as falling property valuations increase the risk of foreclosure. Expect banks to ask tougher questions about your credit-worthiness before granting mortgages - and rightly so.

Yes, a return of deferred payment schemes would again shift the burden of financing to developers and construction companies. But if it helps keep sales ticking over, they may be happy.