Pre-emptive measures to further cool property market

Source : Straits Times – 21 Sep 2009

THE measures taken by the Government to cool the residential real estate market are laudable. It is hoped that cool and level heads will prevail.

However, the interest absorption scheme (IAS) and interest-only loans are arguably offshoots of the disallowed deferred payment scheme (DPS). Buoyant trading and investment in property are also due to the current low interest rate environment, coupled with a dearth of attractive investment avenues over which we have little control.

Given the creativity and astuteness of property developers in Singapore (substituting IAS for DPS is a case in point), measures should also be adopted on a pre-emptive basis.

- Increase down payment ratio to 10 per cent

To nip the problem in the bud, there is one measure that is truly intuitive, and wholly within the Government’s control, which is to increase the cash down payment ratio to 10 per cent from the current 5 per cent of purchase price.

An increase in down payment ratio makes sense and is prudent. If a buyer wants to buy a property for $1 million but is unable to fork out $100,000 (or rather an incremental $50,000) in cash, he is not in a position to take on a leverage of $800,000.

- Disallow cashbacks and circumvention of cash down payment

As a pre-emptive measure, granting cashbacks should be disallowed. As was prevalent in the past, when developers granted cashbacks in the form of cash after completion, lucky draws (where everyone wins), or furniture or renovation rebates. Also, since the cashback is not granted upfront, if the buyer is short on cash, he can easily tap facilities available from credit cards and credit lines with low interest rates (albeit on ’short-term promotion’ basis).

An even more insidious strategy would be that buyers, developers and financial institutions turn a blind eye to what is essentially a round trip in which the buyer takes on a larger loan, and the developer passes the cashback to the buyer from money released by the banks. Both the buyer and the bank are more than willing to be parties to this win-win scenario in view of the low interest rate environment.

These tactics are essentially ways a buyer may circumvent the cash down payment requirement with cheap short-term financing, which, if not mildly prevalent now, will be soon and so should be disallowed.

- Soft or window regulation

Lastly, given how intuitively effective some of the measures are in curbing property price increases, I am led to believe that the Government is aware of these measures and is perhaps taking measures progressively, so as not to come down too hard for fear of inducing a property sector collapse.

Thus, communication from the Government is of paramount importance. Often, musing aloud on what the Government may or will do becomes a measure in itself. Ironic it may be where words do speak louder than actions, this soft or window regulation is perhaps the most efficient way to curb the irrational excesses of the excited masses.

Hsu Chong Pin