EVALUATION OF HOUSING FINANCING SCHEMES IN SINGAPORE

Abstract

The May 1996 property speculation curb and the 1997 economic crisis led to a diminishing demand for private housing as well as falling prices. Developers that committed themselves to the development ofprivate housing before May 1996 are faced not only with an oversupply of housing units but a low demandfor them. In the effort to sell in an adverse market, developers resorted to various promotional andfinancing schemes. Are all these promotions really a bargain for the buyers or are they just gimmicks by the developers? How do buyers evaluate these special financing schemes, such as the Capped Interest Rate, Deferred Payment and Mortgage Subsidy relative to direct price cuts? This study investigates these savings to the buyers and the loss to the sellers. The key variable in the evaluation of these financing schemes is the future mortgage rate; which is unknown. A simulation of the future mortgage rate is carried out based on GMM parameters estimated from historical interbank rates. The results show that direct price cut will result in higher savings by the buyer compared to the different financing schemes. Among the financing schemes, the results show that Mortgage Subsidy results in the most savings. From the distribution statistics, the Present Value of all the financing schemes are very sensitive to price movements.