By Sumita Sreedharan , Wong Siew Ying and Olivia Siong, Channel NewsAsia, 10 Mar 2014
To reduce the focus on Cash-Over-Valuation (COV) in negotiations during the sale of a flat, the Housing and Development Board (HDB) will only accept valuation requests from resale flat buyers after they have been granted an Option to Purchase by flat sellers.
National Development Minister Khaw Boon Wan, who announced this change in Parliament on Monday, said this will restore the original intention of valuation, which is to help buyers obtain a housing loan. This change took effect from 5pm on March 10.
Mr Khaw said: "HDB will rationalise the process of price negotiations and restore the original intention of valuation, which is to help buyers get a housing loan.
Mr Khaw said: "HDB will rationalise the process of price negotiations and restore the original intention of valuation, which is to help buyers get a housing loan.
"Negotiating based on price rather than COV will take some getting used to. However, it is a useful move for long-term market stability."
The HDB will also publish daily prices of resale transactions as soon as they are registered, aimed at getting negotiations to focus on recent transaction prices and reduce the focus on COVs. Currently, resale prices are published twice a month.
The change is timely, with many HDB resale flats being sold at or below valuation, said the government.
More than a third (36%) of resale transactions last month were priced below valuation.
Prices in the public housing resale market have seen a period of high growth in recent years.
But prices declined in the third quarter of last year, a first in four years, after a slew of property-cooling measures were introduced.
Some property analysts say changes in the behaviour of buyers and sellers will take time.
PropNex CEO, Mohamed Ismail, said: "This immediate implementation of such a rule will likely create a more conscious effort in the minds of buyers in particular - 'Am I paying the right price? Will I be affected by any of these valuation that did not match up to the price that I've agreed?'
PropNex CEO, Mohamed Ismail, said: "This immediate implementation of such a rule will likely create a more conscious effort in the minds of buyers in particular - 'Am I paying the right price? Will I be affected by any of these valuation that did not match up to the price that I've agreed?'
"And in that instance, probably we will also see many of the options being not exercised when there is a gap in the expectation of the buyer's valuation and the actual valuation."
If the buyer does not exercise his option, he will lose his deposit of up to a thousand dollars.
So buyers have to plan ahead.
ERA Realty Network's key executive officer, Eugene Lim, said: "Before the buyer goes house hunting, he should actually clear the part about how much loan he is able to get - applying for the HLE (Loan Eligibility) letter from HDB, if you're taking a loan from HDB. Or, if you're taking a bank loan, you should speak to a banker to have an in-principle approval on an approximate loan amount you can get.
"So with the approved amount, it basically gives you an idea of the price of the property that you are looking at."
Mr Mohd Ismail also noted that COV could continue to be a point of reference in estates where resale flats are still being transacted with a cash premium.
"Even though we say you can't do a valuation, that doesn't stop sellers from taking reference from the COVs of the neighbouring flats. And I'm sure that the private organisations and portals are still feeding this information. As I said, old habits die hard and it will take some time," he said.
On the government's property-cooling measures, Mr Khaw said it would still be premature to withdraw them as prices are still rising albeit at a slower rate.
He added the government will continue to monitor the market closely.
To further protect property buyers, the Council for Estate Agencies (CEA) will launch an online guide to provide general tips to consumers who are thinking of buying a foreign property.
The CEA will also step up its effort to regulate estate agents marketing overseas property developments in Singapore. Mr Khaw advised members of the public to report to the CEA any marketing activities by unlicensed foreign estate agents so that the CEA can investigate and take appropriate actions.
Addressing some MPs' concerns about more Singaporeans turning to property investments overseas, Mr Khaw said the government does not interfere with such investment decisions. But he warned that it is a case of buyer beware.
Mr Khaw said: "But I share the concerns of Mr Seah Kian Peng and Mr Liang Eng Hwa. I echo their words of caution. Property markets move in cycles. For foreign properties, there are added risks and complexities, because their legal and regulatory frameworks governing the purchase and financing agreements are different from ours.
"And they may change suddenly when domestic politics pushes for a change in policies. Do go in with your eyes open."
Good to move focus away from COV, say experts
By Janice Heng, Rachel Au-Yong, Maryam Mokhtar and Melissa Tan, The Straits Times, 11 Mar 2014
By Janice Heng, Rachel Au-Yong, Maryam Mokhtar and Melissa Tan, The Straits Times, 11 Mar 2014
REMOVING cash premiums during the negotiation stage of the buying of a Housing Board resale flat is unlikely to rock the market, experts said yesterday.
The reason is that these cash over valuation (COV) prices are now very low, with median COV hitting zero last month.
Sellers are thus less likely to protest, said SLP International Property Consultants director Nicholas Mak. Also, few buyers are likely to be caught out by low valuations, said Chesterton Suntec International director of research and consultancy Colin Tan.
Previously, a resale flat's valuation was obtained first, and buyers and sellers then negotiated on the premium or COV to pay.
In the new system that took effect yesterday, buyers and sellers agree on a price before getting a valuation from the HDB.
In a strong market, the risk is that the valuation may be much lower than the price, limiting the loan a buyer can get. But, in today's weak market, buyers know this is unlikely, said Mr Tan. "There will be less anxiety."
The exception is when buyers seek units in prime locations, which still fetch high COVs. The median COV for five-room flats in Queenstown, for instance, was $37,000 last month.
"(Such) buyers will become more cautious in their offer price as they enter into a purchase without an indication of how much the property is worth," said PropNex chief executive Mohamed Ismail Gafoor.
Such caution from buyers is what worries sales manager Joe Ng, 45, who is trying to sell his four-room flat in Serangoon.
"If (a buyer) proposes a price, he won't propose a market price, it's likely to be lower," he said.
And deals might not close if buyers are caught out, said ERA property agent J. A. Goh. "I foresee more cases of buyers backing out with this new system."
To avoid this risk, buyers may simply continue to rely on private valuations, such as from property firms, said Mr Ismail.
That is what sales executive Lee Choon Han, 37, plans to do as he searches for a flat in Alexandra, Redhill or Tiong Bahru. "I'll try to observe what the market trends are for valuation," he said.
Still, experts think the move will generally succeed in shifting the focus away from COVs.
"It's a good system. It gets the buyers and sellers back to talking about price," said ERA Realty key executive officer Eugene Lim.
The move could also make for a more stable market, said Mr Mak. In the old system, high COVs could cause buyers and sellers to expect continued high premiums, even as valuations rise.
This reinforces the upward trend and vice versa for low COVs. The new system "could help to stabilise the market away from self-reinforcing upswings or downswings", Mr Mak said.
But experts are divided over whether HDB resale prices themselves will be affected.
While Mr Ismail thinks buyers' caution could depress prices, others believe the current low COVs mean little will change. Prices may well fall in the private resale market instead, said GPS Alliance chief executive Jeffrey Hong.
"If HDB upgraders find it harder to offload their flats, they may be unable to upgrade at all," he said. Lower demand for mass-market private properties would then mean lower prices.
Rise and fall of COV – the property mover
It had a humble start in 1993 but later developed a power of its own
By Janice Heng, The Straits Times, 12 Mar 2014
It had a humble start in 1993 but later developed a power of its own
By Janice Heng, The Straits Times, 12 Mar 2014
DEALS were once forged or broken over it. Headlines roared its record-setting highs. Loved by sellers and loathed by buyers, the concept of cash over valuation dominated the Housing Board resale market for years – but perhaps no longer.
In the new resale process, this cash premium or COV is not the focus of negotiations. Buyers and sellers agree on a price and get a valuation; the COV is a mere arithmetic outcome.
Yet that is what COV has always been: the difference between price and valuation.
Only when the property market was booming did it take on a life of its own – and, in turn, the power to move the market.
But its beginnings were much humbler. At the very start, there wasn’t even a name for it.
This was in April 1993, when the HDB relaxed its loan policy to let resale buyers borrow up to 80 per cent of the flat’s market value or declared sale price, whichever was lower. Previously, the loan was up to 80 per cent of the “posted price” – the 1984 HDB sale price – which was much lower.
The new rule meant a need to find out what a flat’s market value was. Enter valuation, and hence the possibility of a gap between price and valuation: that is, COV.
By 1995, worries had surfaced, but only about the dodgy relative of COV – “paying cash upfront”.
Central Provident Fund (CPF) savings could be used to pay for a resale flat up to the purchase price or valuation, whichever was lower.
If valuation was lower than the price, the difference had to be paid in cash. But to save on the sale price levy, some sellers would under-declare the sale price and ask for more cash upfront.
Though the HDB cracked down accordingly, 1996 still saw reports of buyers paying “a premium of $100,000 to $150,000... above valuation”, as in one Straits Times article.
Though the HDB cracked down accordingly, 1996 still saw reports of buyers paying “a premium of $100,000 to $150,000... above valuation”, as in one Straits Times article.
But then, with prices easing by 1997 with the Asian financial crisis, the focus shifted to flats going below valuation. Property ads blared “low cash!” instead.
And this familiar pattern played out again and again. As experts note, COV’s significance rose and fell with the market.
Why wasn’t it a household term in the early 2000s, for instance? Because “the property market wasn’t very hot at the time”, said OrangeTee head of research Christine Li. “(COV) always is a very touchy issue during an upturn in the market,” said Century21 chief executive officer Ku Swee Yong.
He reckoned it was the 2006 to 2007 property cycle in which COV gained major prominence. “Up till around late 2004, prices were generally around valuation – not a huge difference, perhaps within $10,000 or so.”
But by 2007, high COVs were making headlines, such as “some HDB sellers asking for up to $150k above valuation”. When COV sums were so large, they became important in their own right, said experts: to sellers as sources of liquidity, and to buyers as a potential stumbling block.
It was also in 2007 that “cash over valuation” became a standard phrase, recurring in newspaper report after newspaper report.
Before then, references were simply to sums paid above or below valuation.
Perhaps gaining a fixed name was a sign of COV’s growing significance. In July 2007, the Housing Board released COV data for the first time, in recognition that buyers were focusing on such information.
But the prominence of COV could itself have been encouraged by the profusion of media coverage.
Whatever the case, the idea of COV stuck. And experts think it developed a power of its own.
“When it was high, COV was often felt to be a controversial mechanism as sellers tended to compare the COV they got, instead of the actual price,” said R’ST Research director Ong Kah Seng.
Buyers felt a need to chase high COVs, not simply high prices. But when deals closed above valuation, this put pressure on valuations themselves to rise.
And in a declining market, the reverse was true: buyers pushed for prices below valuation, which in turn drove valuations down.
Now, COVs have been taken out of negotiations. That could mean an end to their amplifying effect, and hence a more stable property market, said SLP International Property Consultants’ head of research Nicholas Mak.
Sellers in particular could take a while to adjust, and might still seek private valuations to get a sense of COV, he added.
But PropNex Realty chief executive officer Mohamed Ismail Gafoor saw a way in which COVs might fade altogether.
The HDB’s appointed valuers could follow the practice in the private market, and largely match their valuations to the reported sale price, he said.
That would close the gap between price and valuation – and, by definition, snuff out COV.
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