Singapore’s real-estate market could find itself haunted by a plan that once served it well.
Known as the deferred payment scheme, the plan was implemented by Singapore’s government in response to slumping property prices a decade ago. It was suspended last October.
The scheme allowed buyers of new properties to make a down payment of 10% or 20%, with the rest due only when the project was completed – typically about three years later.
It worked, eventually. After stagnating until 2005, private apartment prices have risen 55% since then.
But like many market distorting policies, some would say it worked too well - it encouraged speculation, and property flipping by not requiring buyers to produce an apartment’s full price upfront.
That’s where the trouble could start. Singapore’s housing prices are already softening as the country falls into a recession. Some analysts figure prices could fall 30% next year.
Those who bought homes at the peak of the boom could see the value of their properties fall sharply by the time they have to line up a mortgage for the remaining 80% or 90% they owe developers. It may not even be possible to arrange a mortgage if banks balk at lending out more than a property is worth.
Certainly this isn’t a repeat of the U.S. subprime mortgage crisis. But at the margin, it has the potential to do some damage to home prices at just the wrong time - as owners rush to dump units before the balance comes due or prices fall further.
About half of private units sold over the past three years could’ve been financed under this scheme - or about 21,000 units under construction, as of July. According to Knight Frank, there are only 238,000 private residential properties in Singapore as most citizens live in government provided housing.
Given the speed at which prices rose, plenty of properties are still in-the-money today. But if real-estate watchers have learned anything in the past few years it’s that when a bubble is popping, it doesn’t take much to make a bad situation worse.
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Singapore’s Housing Plan May Haunt
By Patricia Kowsmann
21 October 2008
Singapore’s real-estate market could find itself haunted by a plan that once served it well.
Known as the deferred payment scheme, the plan was implemented by Singapore’s government in response to slumping property prices a decade ago. It was suspended last October.
The scheme allowed buyers of new properties to make a down payment of 10% or 20%, with the rest due only when the project was completed – typically about three years later.
It worked, eventually. After stagnating until 2005, private apartment prices have risen 55% since then.
But like many market distorting policies, some would say it worked too well - it encouraged speculation, and property flipping by not requiring buyers to produce an apartment’s full price upfront.
That’s where the trouble could start. Singapore’s housing prices are already softening as the country falls into a recession. Some analysts figure prices could fall 30% next year.
Those who bought homes at the peak of the boom could see the value of their properties fall sharply by the time they have to line up a mortgage for the remaining 80% or 90% they owe developers. It may not even be possible to arrange a mortgage if banks balk at lending out more than a property is worth.
Certainly this isn’t a repeat of the U.S. subprime mortgage crisis. But at the margin, it has the potential to do some damage to home prices at just the wrong time - as owners rush to dump units before the balance comes due or prices fall further.
About half of private units sold over the past three years could’ve been financed under this scheme - or about 21,000 units under construction, as of July. According to Knight Frank, there are only 238,000 private residential properties in Singapore as most citizens live in government provided housing.
Given the speed at which prices rose, plenty of properties are still in-the-money today. But if real-estate watchers have learned anything in the past few years it’s that when a bubble is popping, it doesn’t take much to make a bad situation worse.
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