Tuesday, September 15, 2009

Why the hoo ha over the removal of the IAS and IOL??

I don't understand why some people are making such a big fuss over the removal of the Interest Absorption Scheme (IAS) and Interest-Only housing Loans (IOL). In fact back in Jan, I've already written a post about IOL and how unfair it is to the debtor because you will be forever paying that same amount.

Both the IAS and IOL promotes speculation as it allows you to speculate beyond what you can afford, causing the housing prices to appreciate beyond the means of a typical Singaporean. If you look at the recent spike in property prices, you won't even know that you're in the midst of the worst recession since the great depression. Basis of the price hike? None of course. So what happens if the value of the property drops drastically? Who will suffer? No prizes for guessing who.

On a slightly different note, I also strongly believe that the authorities should not allow the cash over valuation (COV) amount to be loaned. Why? Same reason as above. It increases speculation, causing housing prices to appreciate beyond its true value. Using an analogy, why would you want to pay $3 for a can of Coca Cola when you can get it for $1.20 from a vending machine? In fact, why will you want to loan $1.80 to pay for the Coca Cola?

COV will most of the time revert back to its actual valuation because in the end, it's all about supply and demand. You cannot run away from that.

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