Goh Eng Yeow on traders’ reactions to the move to dampen some speculation
PROPERTY counters are reeling from the much anticipated move by the Government to deflate the bubble now brewing in the residential property market.
As I write, City Developments has fallen 74 cents to $10.34, while rival CapitaLand is down 17 cents at $3.70.
What surprises me is the strong reaction by traders to the Government’s move to disallow the interest absorption scheme by developers to lure buyers to purchase new properties.
Essentially, the interest absorption scheme is a variation of the deferred payment scheme which was scrapped in October 2007. It allows a buyer to defer making the bulk of the payment on the property he buys until TOP, once he has come up with the agreed down-payment.
Given the scare at the end of last year when there were fears that large number of buyers on the deferred payment scheme might default on their uncompleted property purchases, it is surprising that traders should have reacted so strongly to the scrapping of the interest absorption scheme.
The problem with such a scheme has always been that buyers might be tempted to over-stretch themselves by buying more than one uncompleted property, or buying something which they could not afford to service, after footing the initial payment.
So, going by the talk around the market, few are surprised by the Government’s move.
But having said that, the sharp fall in property counters could have been due to traders factoring in other possible measures which the Government may be contemplating to cool the heated property market.
Property counters have had a good run since July when they last succumbed to jitters it was because the Government proposed a rule change in income tax to clarify how gains on property sales could be taxed. The proposal was scrapped the following month.
Note that the latest measures announced by the Government to dampen the real estate fever is aimed at uncompleted properties.
But HDB resale prices have also been accelerating as well – and it is this sector which is being watched closely by housing agents, banks, and practically everyone who owns a HDB flat, since it houses 80 per cent of our population.
By sheer coincidence, Tuesday marks the first anniversary of Lehman Brothers’ demise.
Since Lehman's collapse, we have had six months of gloom when there were widespread fears that the global financial system might collapse and end the way of life as we know it, followed by six months of near miraculous recovery.
The next six months may find the markets trying to reconnect with reality, after the past few months of exuberance.
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The hordes of people still rushing to BUY condos are most likely HDB upgraders.
With the previous Govt measures to support HDB prices (additional grants etc), many HDB owners managed to cash out and are now sitting on cash amts of probably around SGD 200k.
That is the reason why many people interviewed at condo showflats claim that they are not worried abt the recent govt measures on IAS etc. They have the 20% down-payment.
The problem is that these people don't yet realise that there is another 80% to pay up.
Recall that 80% of the population of HDB dwellers. The majority of whom have a combined income of less than SGD 8k. A mortgage of SGD 1mio over a 30 year period at current interest rates would probably require a monthly mortgage commitment of SGD 4k - 5k for the next 30yrs.
If property prices fall, banks may do a revalution and require a top-up. A SGD 1mio property revalued 20% lower would require SGD 200k upfront or the owner runs the risk of possible foreclosure and distressed sales.
I can't really see how this frenzy can go on for much longer IMHO.
The govt anti-speculation measures will only have limited effect and not too long after, we can again see hordes of people queueing up at newly launched showflats to buy or flip. Most people think that investing or speculating on property is the easiest and quickest way to make big bucks. True. So until the day we see govt legislating draconian laws or the global economy went into a tailspin, people will continue to push their luck with property.
Typical scenario of new property launches:
1. agents briefed, asked to collect blank cheques from buyers.
2. first day of preview - for agents with blank cheques only, where buyers need not see showflat. Which bona fide owner would not want to see what the millions they are paying for?
3. remaining days - opened to the public. When the crowd rushes in, they see lots of units already sold. That feeds their fear and drives buying frenzy.
Pathetic buyers fall for this kind of ruse. If not curbed, it will bring misery to many.
Dubai offers an example of things to come if a property bubble develops and then bursts. This is an excerpt of what happens there:
Dubai real estate, leaping skywards both physically and financially, enjoyed a final blowout in early 2008. It seemed an exciting alternative to wobbly stock markets for what investors' cash remained in the system.
But after September, it all turned out to have been a Ponzi scheme in disguise. Dubai's trademark developers had been encouraged to sell off-plan sites low to create a feeding frenzy of "flippers" who sold unfinished properties to each other at ever higher prices.
Prices collapsed – down 47.3pc to the second quarter of 2009, more than anywhere else in the world, according to Knight Frank. Some of Dubai's most celebrated companies – Nakheel, who built houses on sand, on the reclaimed Palm and World islands, and Tatweer, which wanted to out-Disney Disneyland in the middle of the desert – teetered on the brink of bankruptcy.
According to one analyst, $300bn of development work was put on hold or cancelled outright. According to another, the city was set to lose up to a fifth of its population as expatriates, who outnumber locals by nine to one, lost their jobs and left.
Removal of IAS is insufficient to cool the overheated property market which has gone too far. I would suggest that our government should implement another control on booking system. That means all bookings to be registered online with IRAS prior to other financial arrangement or confirmation with the developer. This will not only prevent tax evation but also reduce the numbers of speculators (ghost buyers)
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