Cash over valuation back in the spotlight as rising property demand in Singapore drives resale prices up

SINGAPORE, April 5 — Having seen property prices tumble during the 1997 Asian Financial Crisis and the severe acute respiratory syndrome (Sars) outbreak in 2003, Ng thought the ongoing Covid-19 pandemic would present him with a golden opportunity to secure his dream retirement home at a discount.

Instead, the 66-year-old retiree saw prices “go up tremendously” as he ended up having to fork out about S$160,000 (RM492,100) in cash over valuation (COV) for a five-room resale Housing and Development Board (HDB) flat in Pasir Ris. The 27-year-old recently renovated flat came with a price tag of around S$650,000.

Ng had sold his private property in late 2019, just months before the coronavirus ravaged economies worldwide.

“I panicked as I felt that if I don’t buy now, the price may increase further,” said Ng, who declined to give his full name. He eventually signed an option-to-purchase (OTP) early last week for the flat, which is located on the highest floor of its block.

The COV refers to the difference in the sale price of a resale flat and its actual valuation by HDB. If the valuation is lower, the difference has to be paid in cash.

Ng counts himself fortunate to have a pool of money available from the sale of his previous property, but not every home buyer would be in a similar position, he pointed out, particularly with COV prices rising over the past few months.

Sellers’ market

With the recent unexpected recovery of the property market during the Covid-19 pandemic, COV has begun making a comeback — after staying suppressed for years — due to the pent-up demand for homes.

Anecdotally, property experts told TODAY that recent COV figures typically range between S$10,000 and S$50,000. However, it is not unheard of for someone to pay between S$100,000 and S$200,000 for choice flats.

Nicholas Mak, head of research and consultancy at ERA Realty, believes the growing demand in the HDB resale market was driven by construction delays and Build-to-Order (BTO) project launches being pushed back due to the pandemic.

This meant that people who had been looking to buy a new flat — which takes between three and four years to build — turned to the resale market instead.

Agreeing, Christine Sun, realtor OrangeTee and Tie’s head of research and consultancy, said most home buyers purchase flats to live in and not for investment purposes and, as such, there is a limited number of flats put up for sale.

 “(This is) especially for good units that are well located or with positive attributes,” she said.

Lee Sze Teck, head of research at realty Huttons Singapore, said that with more buyers flooding the market in the past year, each property listing has attracted multiple bids, thus driving up resale prices.

 “COVs went up as well, and it takes valuations some time to catch up,” said Lee.

A history of the COV

For a time up until 2014, paying the COV was a normal occurrence as the Government had regularly published COV statistics for resale flats, including the median COV prices for each quarter.

Doing so put buyers in the position of knowing upfront what they had to set aside in cash, and sellers could come to the negotiation table with a valuation report for their flat.

The publication of this data, however, meant that buyers and sellers tended to use the flat’s valuation as the “base price” of the flat, so the price that was agreed upon usually exceeded that, said property experts.

Over time, especially during periods of property boom, COVs rose to levels similar to those seen today.

Median COVs paid by first-time home buyers rose from S$23,000 in the fourth quarter of 2007 to S$38,000 in the same period of 2012. For private property owners who bought a resale flat, the amount surged significantly from S$33,000 in the fourth quarter of 2007 to S$52,000 in 2012.

Then-Minister for National Development Khaw Boon Wan said this practice of bargaining based on COV rather than the total price of the flat was “an anomaly unique to the HDB resale market in Singapore”.

Mak said that sometime after 2011, the Government had sought to curb the tendency for people to negotiate based on the COV that the buyer was willing to pay, and also the ability for sellers to obtain a valuation report before meeting prospective buyers.

Following the 2011 General Election, the Government ramped up the construction of new BTO flats, which kept prices in the public housing market competitive as more people began to buy directly from HDB.

In the same period, the Government imposed a swathe of property cooling measures, including higher buyer’s stamp duty, lower loan-to-value financing quantum, and increased cash down payment for mortgages.

COV values turned negative by 2014, with many transactions settling below market valuation, Khaw said during that year’s debate on his ministry’s budget.

He said: “One evidence that the resale market is turning the corner is the declining trend in the COV. Nearly 40 per cent of resale transactions last month were priced below valuation, a negative COV. In fact, the market has coined a new term — CUV, or cash-under-valuation.”

Soon after, the Government stopped publishing COV figures, and both buyers and sellers would have to agree on the transaction price first. A valuation report can only be obtained by the buyer after the OTP is inked.

This also meant that buyers did not know how much they had to pay in cash, if any.

Said Mak: “(This change of rules) seemed to work a bit, and at the same time, the resale market was also cooling down due to several rounds of the property cooling.”

Post-2014, talk about COVs generally disappeared as a result of the negative COV, as well as the tepid real estate market at the time.

COV resistance

Aside from having to pay for a portion of their home in cash, the policy change to only reveal the COV figures after the OTP is completed has been a bugbear for some first-time home buyers.

Cheow Xin Yi, 37, who bought a resale HDB flat in Kallang Bahru last year, said while she understood where policymakers were coming from, it had affected her ability to make a good decision.

Not knowing the COV upfront meant that she was negotiating with the seller without any clear idea of what the real value of the property was, said the non-governmental organisation employee.

The first-time home owner, who was expecting to use her CPF to fund the bulk of her purchase, eventually found out she had to pay S$20,000 in COV, though it was later negotiated down by half.

“If I had known it was going to be S$20,000 up front, I wouldn’t have agreed to buy the house,” she said.

Analysts believe that some buyers are resisting paying the COV.

Hutton’s Lee said that although prices rose, the volume for resale flats that exchanged hands in the most recent quarter appears to have moderated.

In February this year, there were 13.4 per cent fewer resale HDB transactions than in January, according to property portal SRX. This shows that there has been some “buyer resistance” to paying the COV.

“People may be looking at their purchases realistically and asking why they should be paying more, above valuation,” said Lee. — TODAY