Deferred payment scheme: Why the negative assumptions?

Hasty judgments should not be made just to prevent speculative property buying

I am extremely taken aback by a recent media report highlighting the negative impact the deferred payment scheme (DPS) will have on the property market.

The headline “Deferred payment scheme: Up to 4,200 homes may be dumped” was used to capture readers’ attention.

In the absence of concrete data and evidence, we should not jump to the conclusion that speculators who bought homes under the DPS will panic and dump their units below market prices before the temporary occupation permit (TOP).

On the contrary, it can be argued that this is unlikely to happen because:

• Out of the estimated 4,200 homes bought by speculators under DPS, many have already been resold.

Since most developers do not extend DPS to sub-purchasers, the majority of these buyers would already have backed their property purchases with bank loans.

• Under a typical DPS sale, buyers need to fork out 20 per cent of the purchase price at the outset. This in itself is a substantial amount of money.

Anyone who can afford this sum must have substantial financial muscle and credibility to begin with. It is therefore unfair to speculate that such individuals will not be able to obtain a bank loan or fork out additional cash upon TOP.

• Since completed properties are capable of generating rental income, it will be easier to obtain financing from banks upon TOP. Hence the possibility of panic selling due to the inability to secure a bank loan come TOP is remote.

• Not all short-term property investors are speculators. Many of them are “specu-vestors” ie. people who buy in the hope of flipping their property for a quick profit, failing which they still have the means to hold it for long term investment.

• As the property bull run lasted for more than a year before the sub-prime crisis dampened sentiment, a sizeable number of speculators would already have locked-in substantial profits. Thus, their holding power for any remaining properties will be greatly enhanced.

When viewed in this holistic context, the number of “distress sales” will be lower than the purported 4,200. Moreover, since these homes are scheduled to be completed over a span of three to five years, any negative impact will be spaced out and significantly watered down.

Particularly disturbing is the fact that although the various analysts interviewed were divided in their views, the title and tone of the report was clearly biased towards a negative outcome.

This pessimistic stance was premised upon the assumption that the property market would remain stagnant for an extended period of time. However, given that strong fundamentals continue to prevail, who is to say that an upswing is not round the corner?

In our attempt to guard against speculative property buying, let us not commit a greater sin by indulging in speculative forecasting and reporting.

Wong Siong Yan

Source : Today – 6 May 2008