Why We’re Seeing a Spike in Returned Units from 2018

There’s been a huge spike in returned units (paywall) from the last quarter of 2018. This suggests sales volumes were much lower than reported, and developers are now re-issuing Options. Here’s what it means and why it happened:

The “phantom sales” of Q4 2018

There’s been a discrepancy between the actual number of sales transactions recorded by URA, versus the number of sales developers claim. The reason is that developers often claim a sale once the Option to Purchase (OTP) is  secured.

The OTP requires a non-refundable deposit of around one per cent of the purchase price – once the OTP is secured, it’s commonly assumed the unit has been sold. It’s rare for buyers to back out due to the financial cost – but that’s exactly what we’re seeing from Q4 last year.

URA says the actual number of transactions for Q4 last year is now 1,836 units – that’s 20.3 per cent (or 469 units) fewer than initially reported. For last December alone, 602 units were reported as sold, but more than half of these (398) were returned, with buyers forfeiting the OTP.

Why is this happening?

The four main reasons are:

• Reservation or extension schemes
• Recent cooling measures
• Wider market issues
• The inevitable impulse buyers

1. Reservation or extension schemes

Some condos feature “reservation” schemes, or “Extension of OTP” schemes.

For example, say you want to buy a specific unit because of its facing and view. However, you cannot secure a bank loan within the 14 to 21 day period of the OTP. Or perhaps you want to wait until you sell your old house, before you buy a new unit (to avoid the Additional Buyers Stamp Duty).

Sometimes, the developer has a scheme where you can secure the OTP anyway so the unit is reserved for you. When the OTP lapses, the developer automatically issues a new one to you, and so on until you can purchase the unit. This ends up contributing to the count of total “returned units”.

(Note: it’s not free to do this, there’s often an administrative cost of about $300 to re-issue the new OTP).

By happy coincidence, this also lets developers legitimately claim that lots of buyers are “already putting down cheques”, and that the units are selling fast (as they recognise the sale as soon as the OTP is secured).

But this does muddy property sales results, as units bought on reservation aren’ truly sold yet. This also contributes to the larger number of OTPs that developers seem to be re-issuing.

2. Recent cooling measures

The recent cooling measures tightened banks’ Loan-To-Value (LTV) ratios. The minimum down payment on a private property is now 25 per cent instead of 20 per cent. For most mass market condos in the million dollar range, this translates to buyers having to fork out roughly $50,000 to $60,000 more.

On top of a tighter LTV, home loan interest rates are rising. Credit officers are be getting leery; home loan rates have been at a 10-year low, and seemingly have nowhere to go but up. As such, some buyers may have trouble getting financing for their purchase.

Some of these buyers may be forced to forfeit their OTP and get another one, while waiting for the bank loan to come through. Again, this would add to the count of returned units.

3. Wider market issues

The wider market has been crazy of late, what with trade wars and Brexit. Some investors are switching to a wait-and-see approach; there’s even some who are holding on to cash in hopes of a hard Brexit (they believe the pound will fall significantly, and make UK properties cheap).

Expectations that Singapore property values will fall (based on sustained cooling measures and a weaker economic outlook) can also cause some investors to hold back.

Some of these investors are willing to forfeit their Option money, rather than risk making a bigger, longer term investment mistake.

4. The inevitable impulse buyers

As often as we and thousands of other property agents warn about this, it keeps happening: an over-eager first-time buyer, lured in by a false sense of urgency, jumps to secure the OTP. Some even do this before they’ve received Approval in Principle (AIP) for a bank loan.

Later, buyer’s remorse – or the inability to secure a sufficient loan – causes them to forfeit the OTP. Some of these buyers may not even realise the OTP is not refundable, or else they’d have been less cavalier about allowing it to lapse.

There may be incoming changes to address this issue

The accuracy and value of transaction records diminish, if we keep seeing a high volume of “phantom sales”. And we should point out we saw a similar situation already, with lots of returned units back in 2017. We suspect it’s just a matter of time before some procedural changes are implemented.

In the meantime, we guess it’s good news for some property buyers. Revisit your old condo choices, you might find they’re available after all.

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