HDB resale without COV

Minister for National Development Khaw Boon Wan changed the rules for resale HDB flats on Monday 10 Mar, by requiring buyers and sellers to agree on a sale price before getting an official valuation of the flat. Currently, the seller would obtain a valuation and this is also the price the buyer can get a loan for, or use his CPF to pay for. The seller could offer the flat for a lower than valuation, if there is some reason (say, the need to sell the flat quickly), or ask for a higher price, which would not be covered by the loan or CPF, and so the buyer would need to pay the Cash over Valuation (or COV). 

Thus all negotiation has been about whether it is over or under Valuation, and if over, how much is the COV. 

In a bull market, a sellers' market, COV has been escalating. 

However, new measures and perhaps the general market cycle has brought COV down and currently, it is no longer the Sellers' market that it used to be. 



And now this new rule or process.


Mar 11, 2014

FROM THE GALLERY

Khaw, Zen and the art of motorcycle parking charges

Change demonstrates not just good government, but also a caring one

By Chua Mui Hoong Opinion Editor


IF THE late Mr Lim Kim San is credited with having "broken the back" of Singapore's housing problem in the 1960s, Mr Khaw Boon Wan can be said to be the man who is whipping today's HDB market back into shape.

The National Development Minister took on the portfolio in May 2011 when there was a shortage of new Housing Board (HDB) flats, forcing buyers into the resale market, and spiking prices. Buyers paid high cash-over-valuation (COV) amounts as sellers would sell only at prices higher than the valuation of their flats.

Yesterday, Mr Khaw landed a killer punch on COVs.

In one fell swoop, he abolished the COV scheme. Rather than use valuation reports to negotiate prices as now, buyers and sellers of HDB resale flats will get access to daily transacted prices. Only after a price is agreed on and the deal signed can the buyer get a valuation price for the flat.

By so doing, Mr Khaw wants to use market information to influence market behaviour. He is repeating what he did in 2005 when, as Health Minister, he ordered the release of bill sizes of hospitals and, later, average lengths of stay for common procedures. This gave patients immediate access to transparent price information. Over a few years, competition led to hospitals lowering prices.

Presumably, the hope is that access to nearly real-time price data will lead buyer and seller of resale flats to come to a more realistic price equilibrium.

But will it do so?

In a bearish market, this information is likely to lead to more caution. Some property experts say the move creates uncertainty which will lead buyers to bid more conservatively for their flats.

But my fear is that in a rising market, prices can creep up by the day, so there is every possibility that such a system will fuel price spikes in a bull market.

Right now, valuations in a rising market serve as a check on prices. If a flat is valued at $400,000 and sells for $500,000, the buyer knows he is paying a premium. Even though the HDB website does not show each flat's COV, the agents will know and will inform other buyers about prevailing COVs for units sold recently. As few buyers are willing to pay very high COVs, a single high transaction has limited ability to influence prices of other flats, if the COV is transparent.

In the new system, the data will only show a transacted price of $500,000, which could lead other buyers into thinking that is the "reasonable" price, not the "premium" price.

[So here is the first concern. If only the transacted price is reported, it would not inform the buyer whether the transacted price is above or below valuation, whether the price is reasonable or not, and whether the buyer had to fork out cash. Because if the agreed price is $500k, but the valuation is only $480k, the CPF and Loan will only cover $480k. $20k will have to be paid in cash. So there is still COV. Except that now instead of negotiating that in the open, COV could sneak up on your without warning. If the average transacted price is $500k, and you prudently agree to $480k (just in case), it may well turn out that the valuation might still be less, say $450k. Perhaps the valuation of all the transactions you referenced, were all valued at $450k. But that information is not available to you.]

The HDB housing market is a fickle creature that twitches easily to government tweaks. Government policies over the years have had a major impact on its ups and downs. Given the already cooling market, hopefully Mr Khaw's move will kill just COVs and not the entire HDB resale market.

Having tackled the big piece of the housing problem - building new flats for young couples - Mr Khaw said he will focus next on making housing more inclusive, for the elderly, singles and "vulnerable families" such as single parents and divorcees.

Any decision to, say, permit unwed mothers aged below 35 and their children to buy subsidised HDB flats, or give priority for new HDB flats to divorcees with children who are left homeless after the divorcing couple sell the matrimonial home, will be highly controversial.

Here, Mr Khaw demonstrated his consummate politician's skills when he said: "I intend to further engage Singaporeans on the relationships and values we hold dear as a society, and how housing policies can better support them."

Changes to values-driven housing policies need public buy-in.

Not so market-sensitive COV changes, which are best made blitzkrieg style, without public consultation.

[segment on per minute motorcycle charges deleted]


BUDGET DEBATE 2014

Move to remove COV a bold, timely U-turn

Mar 12, 2014

By Jessica Cheam

It's been a long time coming, but on Monday the Government finally bit the bullet and did what it should have done years ago - it found a way to get rid of COV from the public housing market sale process for good.

COV, known as cash-over-valuation, is the cash premium a buyer pays over and above the valuation of an HDB resale flat. As it must be paid in cash, it has a significant impact on affordability and is often used as a barometer of demand in the housing market.

As of 5pm on Monday, COVs have been banished from the sale negotiation process, and buyers and sellers must now agree on a price before seeking an official valuation. That is in line with the private market where negotiations are "rightly" based on recent transaction prices, noted National Development Minister Khaw Boon Wan.

With the new rule, a price must first be agreed on and the Option To Purchase (OTP) granted, before a buyer can get a valuation from the HDB. This will, Mr Khaw added, "restore the original intention of valuation, which is to help buyers get a housing loan."

Since news of the policy change broke, many buyers and industry players have welcomed the move, while some others have accused the government of "bureaucratic intervention".

In reality, the removal of COV will only serve to stabilise the public housing market in the long run and we should be encouraged that the Government has been bold enough to make a U-turn on this policy, given that only a couple of years ago, (in 2011) Mr Khaw categorically stated that he "cannot abolish cash premiums" despite calls to do so. 

The COV has been a problematic issue, especially in a rising market, because sellers almost always ask buyers for a cash premium above the valuation of their flat - even though the attributes of their flats have already been taken into consideration in the valuation. Negotiation was done mostly on COVs rather than the total price of a flat.

This caused an upwards price spiral in the market which analysts had compared to a "case of the cat chasing its tail". This caused widespread unhappiness among home buyers, especially when COVs hit record highs, with the median COV peaking at $38,000 in mid- 2011. Some units in popular estates even fetched $100,000 premiums.

Then, at the height of the property boom, Mr Khaw in defending why he could not abolish COV, explained: "It is simple... COV is the difference between (a) price of flat as agreed between buyer and seller and (b) the valuation of the flat given by a professional valuer. (b) is done by an objective professional. (a) is between buyer and seller.

The question was who would set the price if the COV was abolished? It certainly could not be determined just by professional valuers, Mr Khaw noted.

A decade ago, the government tried removing COV but this went "underground" in cash-back schemes exposed in 2001, where buyers and sellers colluded to over-declare the agreed selling price. It allowed the buyer to get a higher loan either from a bank or the HDB, with the "extra" cash illegally divided out among those involved.

In recent years, buyers and sellers came up with other ways of falsely declaring a low sale price - with the buyer giving the seller some cash in return. Such offences are punishable by a jail term and/or a fine.

So the COV returned and has remained a permanent fixture of the public housing resale market - until now. But the solution was obvious even back then - industry observers had suggested: why can't the public housing market follow the practice of the private market, where buyers and sellers negotiate a purchase price based on recent transactions?

Buyers can at the same time, like in a private property transaction, seek indicative valuations for the flat from private banks and valuers to ensure the purchase price is not too far off, and after the purchase, look for a bank that could offer a loan matching the valuation of the property.

[Here is the second problem. Say I am a prudent and careful buyer. I look at a flat, I get all the info, I go to the bank, and I ask the bank for an "indicative valuation". Say the bank gives an indicative valuation of $500k. I managed to negotiate the price to $485k with the seller. We then get a valuation from HDB. HDB values the flat at $475k. And the bank caps it's loan to $475k in line with the official valuation. I'm still saddled with trying to come up with $10k in cash. In the private property market, $10k is nothing. For HDB dwellers, $10k is not nothing.]

By requiring buyers to get fair valuations from HDB after a price is agreed also overcomes the issue of buyers and sellers over-declaring a sale price. It would not be in the buyer's interest to do so because he would have to fork out the difference in price should the sale price differ significantly from the valuation.

With the latest move, even though the COV technically still exists if an agreed sale price is above the flat's valuation, it effectively removes the COV element in the sale process.

Introducing this policy at a time when COVs are at their lowest levels for years is a also a well-timed move, since it reduces the sting for sellers who might think they are losing a "bargaining chip" in the sale process.

That HDB will now publish daily figures on resale transactions rather than fortnightly will also significantly increase the transparency and availability of data in the public housing market, thus enabling buyers to accurately negotiate a price based on recent transactions. This will further help to reduce the speculative element in the market.

Taken together, they will have a significant impact in creating a far more stable public housing market and help reduce the volatility in prices that we've seen in the boom and bust cycles in the past decade or so. This can only be a good thing.



Today Voices

[Two letters, included here for two different opinions. The second letter notes the uncertainty the new process adds to the negotiation and transaction.]

New HDB rules do not change resale market

From Lee Sze Teck

March 13

The National Development Ministry has announced new procedures for the Housing and Development Board resale market (“HDB resale: Parties must agree on price before valuation”; March 11).

The reasons given were: To focus negotiation on price instead of cash-over-valuation (COV) and to put the process in line with that of the private property market. The state of the market was also taken into consideration.

But this does not change the resale market or even prevent the existence of COV. It merely shifts the valuation report to a later stage and, perhaps, avoids the situation of sellers requesting for a new valuation.

Buyers and sellers can still call any HDB-appointed valuer and request for an indicative valuation. However, the valuer may not be the one who does the report. Seasoned property salespeople can also advise buyers and sellers on the value. It really depends on whether buyers and sellers want to use the published HDB prices, an indicative valuation or a salesperson’s advice.

This practice of requesting for a valuation report after an option has been granted in the private property market has mostly seen valuers matching the agreed price. If the same were to happen in the HDB resale market, it would serve only to stop the slide in prices and mask the visibility of COVs.

Revised HDB resale process will cause uncertainty

From Tai Chee Keong

March 13

The revised Housing and Development Board resale procedures will create uncertainty rather than stability (“HDB resale: Parties must agree on price before valuation”; March 11).

First, the new practice requires a seller and buyer to negotiate the price based on daily, published transacted prices. How should they proceed, though, if there is no comparable data for negotiation?

It is like entering a market without knowing the price of the goods one wants to buy, negotiating blindly and hoping to agree on a price. This creates unnecessary anxiety for both parties.

Second, a buyer must now obtain the valuation report after the option-to-purchase is signed. If he realises that the negotiated price is way above valuation, he can withdraw from the deal, but it will mean forfeiting his deposit. Or, to avoid the forfeiture, he would have to pay a price above the valuation.


TODAY

[Another comment from a Real Estate Consultant. I think it seems quite fair and balanced. And his point that High COV will be gone may be valid. But I think that depends on how much "irrational exuberance" there is in the market. And the market can be very irrational. As Chua Mui Hoong (above) noted, the reported transaction price merely reports the prices transacted, not the valuation of the property. 

His final suggestion about capping HDB capping the loan quantum is contradictory. If the purpose of the new process/policy is to consign COV to history, capping the loan to 80% of valuation, simply means you have to pay cash for the 20% not covered. Which means Cash. Maybe not "over valuation" but still cash you need to cough up upfront.]

COVs: Consigned to history?

BY COLIN TAN

MARCH 14, 2014

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.

[Can we expect official valuations to be very close to the agreed price? Mostly. But not necessarily. See the letter below.]

ST Forum

Mar 14, 2014

Property valuers follow guidelines, not prices

WE REFER to the comment made by Mr Mohamed Ismail Gafoor of PropNex Realty that "HDB-appointed valuers could follow the practice in the private market, and largely match their valuations to the reported price" in an article ("Rise and fall of COV - the property mover"; Wednesday).

The Singapore Institute of Surveyors and Valuers (SISV), the national body representing the valuation profession, regrets Mr Ismail's comment, which casts aspersions on the professionalism and integrity of valuers.

In the valuation of all properties, be it HDB flats or private properties, valuers have to adopt the principles of valuation as prescribed in SISV's valuation standards and guidelines.

The market value of a property is the estimated amount for which the property should exchange on the valuation date between a willing buyer and a willing seller, in an arm's length transaction after proper marketing and where the parties have each acted knowledgeably, prudently and without compulsion.

The price of a property is the amount asked, offered, or paid for the property. Due to the financial capabilities, motivations or special interests of any given buyer and seller, the price paid for the property may or may not have any relation to the value that might be ascribed to the property.

While transacted prices can be a good indication of the market value of a property, it does not follow that a valuer will largely match the value of a property to its reported price.

Janet Han (Ms)
Secretariat
Singapore Institute of Surveyors and Valuers

---------------

Apr 10, 2014 Update

Flats with existing valuations favoured

BUYERS are favouring resale flats which already have official valuations, as such deals offer more certainty, say agents.

Since March 10, the Housing Board has accepted valuation requests only from buyers who have been granted an Option to Purchase by the seller. But it will honour valuations which were granted earlier and have not expired.

"As a typical valuation report is valid for up to three months, many transactions this month are not really affected by the changes yet," said OrangeTee managing director Steven Tan.

Said PropNex Realty agent Michelle Lai: "(Buyers) are not buying the units that fall under the new ruling. They're buying the units with existing valuation."

The HDB valuation decides a buyer's maximum housing loan and how much Central Provident Fund savings he can use.

By knowing the valuation at the point of agreeing a price - as was the case under the old process - the buyer can judge how much cash he will need to pay.

This certainty is absent in the new system, since a price is agreed before the valuation is granted. And that is why flats without existing valuations "are the ones that buyers aren't keen on", said Spacez Real Estate agent Cheryl Tan.

JANICE HENG
 Apr 10, 2014

HDB resale rule one month on: Buyers cautious

Buyers fear high cash outlay while sellers' bargaining position weakens: Property agents

By Janice Heng

A MONTH after the Housing Board's new resale process began, the need to agree a price before getting a valuation has not been popular, say property agents.

Even though the market has adapted to looking at past transactions as a guide, buyers still dislike the uncertainty over their cash outlay, while sellers find it hard to bargain.

Previously, sellers would first get an official valuation from the HDB, then use it as a basis for negotiation with buyers.

But from March 10, the HDB accepts valuation requests from buyers only, and only after a price has been agreed.

"First, there were a couple of weeks of confusion," said Prop-Nex Realty agent Michelle Lai.

And though buyers now better understand the change, they are holding off on making decisions.

"Even though they are keen to buy, they are reluctant to decide a price," said Spacez Real Estate agent Cheryl Tan.

This might partly be due to the hope of better deals later. Dennis Wee Realty agent Priscilla Pang said: "I believe that buyers are still holding on, waiting for the market to drop further."

But there are also concerns about possible nasty surprises.

The HDB valuation determines the maximum housing loan and amount of Central Provident Fund savings that can be used to fund a purchase.

If the agreed price is higher, the excess is paid in cash - what was known as cash-over-valuation (COV).

Previously, buyers knew the cash premium they were committing to when they agreed a price. Now they do not, making them more cautious in their offers.

"It's a guessing game," said Singapore Estate Agency agent David Ang. "If their finances are tight, they bear the risk (of a high cash outlay)."

And if they back out, they lose the amount they had to pay the seller for an Option to Purchase, which is usually about $1,000.

[Possible evolution of the market: Sellers a) accept a lower option to purchase "deposit"; or b) will have a conditional "refund" if the valuation is below a certain amount]

In today's cool resale market, the risk is lower.

The median COV fell to zero in February, with many units in non-mature estates going for prices below valuation.

Still, Dennis Wee Realty agent Judy Tan advises buyers to have enough ready cash - at least $10,000, say - so they will not be caught out.

As for sellers, the change weakens their bargaining position, as they can no longer use the valuation as a basis for asking price.

"Most sellers today are desperate" as they have bought new flats or condominiums and are collecting their keys soon, notes Prop-Nex Realty agent Charles Tan.

Nevertheless, both sides are getting used to the new reality.

One alternative Mr Tan uses to help sellers is the Singapore Real Estate Exchange's X-Value, which approximates a unit's value.

But most agents say the HDB's proposed option - looking at past transactions - is enough.

"Ultimately, using past transactions in the vicinity is more useful (than a single figure)," said ERA Realty agent David Lim.

The change has not affected popular areas such as Queenstown and Ang Mo Kio, he said, adding that, otherwise, "buyers are adapting".