As shared in our latest Property Market Index Q4 2020, the past quarter closed with a major announcement by the Controller of Housing (COH) to clamp down on sellers and developers who have been reissuing property options.
What is this new restriction? Why did sellers want to reissue options-to-purchase (OTP)? In this article, we’ll cover all that and examine the effect this policy has had on the market so far.
The Government clamps down on OTP reissuance
On 28 September 2020, the government’s new restrictions barring sellers or developers from reissuing Options to Purchase (OTPs) to sellers kicked in. For buyers, this means it will no longer be possible to get an OTP without being sure that you’re able to exercise it by the deadline.
Read more about it here: What Is An Option to Purchase And Are Sellers Allowed To Keep Re-Issuing OTPs?
When you find a property that you want to purchase, you obtain an OTP from the seller or developer. This document is a contract that gives you the right to buy the property.
In order to obtain the OTP and therefore reserve the right to buy the property, the buyer usually pays a booking fee worth a small percentage of the property price. This booking fee will make up part of your payment for the property if you go on to purchase it later on.
Once the booking fee has been paid, you will need to exercise the OTP by a certain date in order to enter into an agreement to buy the property. For new launches, in order to exercise the option you need to return a signed Sale and Purchase Agreement within three weeks. Once this is done, you are officially a purchaser of the property and will need to prepare to pay your deposit.
If you fail to exercise the OTP on time, the booking fee will be forfeited and the right to buy the property will no longer be reserved for you.
Why do sellers reissue OTPs?
So, what exactly has the government stepped in to regulate? The issue is that some developers have been deliberately failing to forfeit booking fees when buyers do not exercise their OTPs on time. Instead, they repeatedly issue new OTPs to the same buyer when the previous ones expire.
This gives the buyer time to exercise the OTP at a later date. For instance, some buyers might need time in order to save up for a deposit or sell their existing properties.
For new launches, buyers usually have 3 weeks to exercise the OTP once they pay the booking fee and receive the Sales and Purchase Agreement from the developer. However, by repeatedly reissuing OTPs, some developers have reportedly given prospective buyers up to 18 months to exercise the OTP.
By reissuing OTPs, sellers are able to inflate their sales figures. More prospective buyers are ready to pay the booking fee for an OTP if they know there is no urgency to exercise it. Some speculators obtain an OTP when they do not even know if they wish to exercise it. There might also be buyers who, after obtaining an OTP, decide to abandon the sale for financial reasons.
How are buyers affected by this policy?
As of 28 Sep 2020, the government no longer allows reissuing of OTPs. This puts pressure on prospective buyers to exercise their OTPs within the stipulated three-week period.
What happens if you don’t exercise the OTP within three weeks? You lose your booking fee and must wait 12 months until the developer can reissue another OTP to you.
If you genuinely need an extension and the developer agrees to give you one, you can apply for a 12-week extension by emailing the URA.
What have been the effects of the new restrictions?
It has been less than two months since the new restrictions kicked in at the end of September.
Predictably enough, there was a dramatic spike in OTPs issued on the last weekend of September prior to the restrictions kicking in, particularly due to the launch of condo development Penrose, with over 60% of units being sold over the launch weekend.
“Like all previous announcements in the past, such restrictions usually encourage buyers to take their last chance before the gate closes,” said ERA Advisory Group Division Director Zac Huang.
“Home upgraders who wished to lock in their unit before the cooling measures wanted to get their paperwork done so they wouldn’t be affected by the new restrictions,” added property agent Rex Tan.
The restrictions seem to have had a temporary cooling effect, with private home sales falling by a steep 51.7% in October right after they took effect. 642 private homes and Executive Condominiums were sold in October, as opposed to 1,329 the previous month.
That is not surprising, since the goals of the curbs are ostensibly to stop developers from inflating their sales figures and to force buyers to be more prudent in their purchasing decisions.
However, it is important to note that there were no new launches in October. So, part of the fall in private home sales can be attributed to this lack of launches rather than the new restrictions.
As we make our way through November, it looks like home sales are already starting to pick up after the initial slump.
Based on URA’s records, there were 287 transactions from 1 to 8 November, which indicates that sales are accelerating. Top selling properties so far include Forett at Bukit Timah, Treasure at Tampines and Jadescape.
In addition, sales of units at The Linq @ Beauty World have not been included in the 1 to 8 November tally. 96% or 115 of the 120 units were sold during the launch on 14 to 15 November, giving a big boost to the total sales figures for November to be released at the end of the month.
This comes as no surprise to property agent Jeremy Lim.
“Sales generally slowed down a little (after the restrictions kicked in) but not very significantly. Professional salespersons will be able to handle the buyers’ needs and requirements (now that the restrictions have kicked in) and execute the proper planning. Once buyers understand these new regulations better in the next two to three months, activities should resume,” he said.
Zac agrees that the restrictions should not have a major impact on buyers. “It will help sieve out genuinely ready buyers,” he said.
This aligns with the Property Market Index Q4 2020, which predicts that any impact is likely to be a short-lived, knee-jerk reaction.
While the new measures had a cooling effect in October, the month immediately following the announcement of the restrictions, sales figures seem to be bouncing back strongly based on the number of units sold in the first half of November.
For more data and insights on Q3 2020, read our Property Market Index Q4 2020.
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