HDB moves to reduce focus on COV

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.

"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?'

"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."

Post by Ministry of National Development.

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

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

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.

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.

Removing COV is a bold, timely U-turn
It will stabilise HDB market in long run; timing reduces sting for sellers
By Jessica Cheam, The Straits Times, 15 Mar 2014

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 cash over valuation (COV) from the public housing market sales process for good.

COV 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 were banished from the 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 upon 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, Mr Khaw categorically said 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 were 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 Housing Board, 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, as 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.

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 sales process.

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

Free Web estimates of HDB flat, condo values
By Janice Heng, The Straits Times, 21 Mar 2014

THERE is a new Web service to help buyers and sellers get an indicative value of properties, a timely move now that official Housing Board (HDB) valuations can no longer be obtained before both parties agree on a price.

The X-Value Calculator by the Singapore Real Estate Exchange (SRX) estimates the market value of a property based on past transactions. It also shows how this estimated value has changed over the years.

Its launch yesterday was timely in the light of the HDB rule change, said PropNex key executive officer Lim Yong Hock: "It can help sellers and buyers get a fair and objective sense of the market."

Previously, buyers and sellers obtained an official valuation via the HDB before deciding on a price.

Since March 10, they have had to decide on a price before getting the valuation - a change that has caused uncertainty among sellers who fear pricing their flats too low, and buyers who fear a large cash outlay if the price greatly exceeds the eventual valuation.

"X-Value solves this problem," said SRX chief executive officer Sam Baker. But he stressed that it is only an indication and does not replace a full professional valuation.

The X-Value Calculator on www.srx.com.sg covers HDB and condominium units, and will soon cover landed property too.

It was funded by the Infocomm Development Authority of Singapore, under a Call-for-Collaboration project that taps both government and private data.

It draws on past transaction data from the HDB and from SRX's 13 member property agencies.

Of these agencies, five provide valuations to clients - and most of these agencies will use X-Value in making their appraisals, said SRX chief technology officer Jeremy Lee.

* HDB resale rule one month on: Buyers cautious
Buyers fear high cash outlay while sellers' bargaining position weakens: Property agents
By Janice Heng, The Straits Times, 10 Apr 2014

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.

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".

Related

A Stable Housing Market, Better Homes for All

Why can’t HDB scrap the practice of paying Cash-Over-Valuation?

Why has the process for negotiating resale prices been changed?