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COVs: Consigned to history?

On Monday, a piece of Singapore’s public housing story was consigned to the annals of history after National Development Minister Khaw Boon Wan said in Parliament that buyers and sellers of Housing and Development Board (HDB) resale flats must agree on a price before seeking an official valuation for the purpose of applying for an HDB housing loan.

On Monday, a piece of Singapore’s public housing story was consigned to the annals of history after National Development Minister Khaw Boon Wan said in Parliament that buyers and sellers of Housing and Development Board (HDB) resale flats must agree on a price before seeking an official valuation for the purpose of applying for an HDB housing loan.

Cash-over-valuation (COV) — the difference between the flat’s selling price and its official valuation — which had dominated the HDB resale market for years, will no longer exist, in theory at least. In a practice that is unique to Singapore — it exists nowhere else in the world — almost all HDB flat sellers had hitherto obtained a valuation before marketing their property, usually as a guide to its worth in the market.

To re-focus the market’s attention on the selling price, the HDB will now provide daily updates of recent resale transactions as soon as they are lodged. Sellers and their agents can now use them as comparables to set the initial asking price for their flats.

Will it work? That depends on whether COVs remain relevant to the market. If the difference between the selling price and valuation remains high, the COV will continue to exist, whether by the same name or by any other. And marketing agents will continue to compile such data.

The most frequent comment by property experts following Monday’s announcement is that buyers will now have to be extra vigilant. They will have to negotiate very hard lest the valuation falls way short of the agreed price. And if buyers cannot come up with the cash, they will have to pull out of the deal. But don’t buyers do this already?

So, will it come down to the appraisers on the HDB’s valuation panel? Will they give an appropriate premium to some of a flat’s positive features?

After all, some of the very high COVs reported by the media in the past were the result of the valuer not fully appreciating the market’s take on the flat.

Personally, I feel that these valuations could have been executed better: It is inexcusable for the valuation to be so vastly different from the selling price, sometimes by as much as 15 per cent, unless there are very good reasons. One often-quoted reason is the long time lag between valuation and sale, and the effects of this may be compounded by fast-changing market conditions.

But now the timing of the official valuation — after a price is agreed — means that any lag period between the actual sale and the date of valuation will only be as long as the time a buyer takes to request a valuation and its delivery.

Previously, new market comparables were made available to valuers only once every two weeks. And if the flat is exposed on the market for six weeks, it means the valuation could be outdated by as much as two months or even longer, if it takes more time to sell the property.

Needless to say, a lot can happen in two months.

The biggest help to a valuation being done under the new system is that the property would have been exposed to the market for a period of time.

Every property is unique simply because it does not occupy the exact same location as any other, and property is all about location. Comparables are after all comparables, not the real deal. And the adjustment process is not an exact science.

The marketing ends when the seller feels he has received the best offer under the prevailing circumstances. If that is not the best indication of the value the market attaches to the property, what is?

So, we can expect most official valuations to be very close to the agreed price in the absence of suspicious circumstances where the sale is not concluded at arm’s length. The days of COVs rising to as high as S$80,000 to S$90,000 should be a thing of the past — notwithstanding rapidly changing market conditions.

If the HDB feels that resale prices are rising too quickly and not supported by the fundamentals, it can always lower its loan quantum to below 80 per cent, just as the banks do with private housing transactions when they feel the market has become too bubbly. Or it can even call for partial capital repayment as market conditions change.

 

Colin Tan is Director of Research and Consultancy at Suntec Real Estate Consultants.

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