After consecutive quarters of increasing HDB resale prices, anyone looking (or even thinking) about buying a resale flat would already know that it is a seller’s market right now. Demand for resale flats have increased dramatically, partly driven by the bottleneck in HDB construction delays and the desire to have more space as working from home continues to be the default arrangement.
With this demand for resale housing driving up prices, some realtors have started cautioning buyers to be prepared to pay Cash-Over-Valuation (COV) on top of their option fee and deposit. For a would-be buyer with a tight budget, this can be discouraging news. So, let us explain what is Cash-Over-Valuation and how it affects HDB prices.
What is Cash-Over-Valuation (COV)?
Cash-Over-Valuation (COV) is the amount that the buyer has to pay in cash when the price of the property is higher than the market valuation of the flat. This applies for all private properties and HDB resale flats.
For private properties, COV rarely affects the transaction process because both buyers and sellers can request for and obtain a valuation prior to making an offer or listing the property for sale. This means that the COV amount is clear to the buyers if they intend to make an offer higher than the market valuation.
Source: HDB, 2014
For HDB resale properties, the process is different since 2014. Before 2014, the HDB sellers usually obtained the valuations before selling their flats. As 2013 was also the peak of the resale market (with a high of 149.2 in 2Q2013 on the HDB resale price index), sellers also used the valuations to negotiate for higher prices to obtain higher COVs. Notably, one of the highest COVs recorded was for a HDB executive maisonette in Bishan sold in December 2013 with a COV of $250,000 and a resale price of $1.05 million.
Since 2014, HDB has required buyers and sellers to first agree on the resale price, without the official valuation. The valuation is obtained after that for the purpose of determining the amount of loan and CPF savings that can be used for the flat purchase. This and other property cooling measures in 2013 managed to bring down the prices of the overall resale market and COVs.
Cash-Over-Valuation Has Increased In 2021
With the current resale market picking up in price and volumes, Cash-Over-Valuations (COVs) have also made a comeback.
According to Ministry of National Development, the proportion of buyers who paid a COV increased from around one in five (20%) in 2020 to around one in three (33%) in 2021. However, most buyers did not have to pay any COV, and the median COV has remained at $0. In comparison, between 2010 and 2013, almost all resale flat buyers paid a COV.
Additionally, based on resale flat transactions registered from Jan 2020 to Apr 2021, less than 25% involved a COV. Of the transactions that involved a COV, most of them were not more than $20,000, even for popular regions such as Central.
|Region||Proportion of Resale Transactions with COV|
|COV ≤ $20,000||COV > $20,000|
The Current Process Makes It Difficult For Buyers To Budget Their HDB Purchase If Valuations Are Lower Than Expected
While it is assuring to know that currently, most buyers don’t need to pay a Cash-Over-Valuation (COV), the numbers may not reflect the realities of the transactions.
As the valuation is only obtained after the price is agreed, a buyer can run into a situation where you have to fork out extra cash to complete the purchase or forfeit your option. For example, you and your seller agree on $500,000 for the purchase price and you pay the option fee of $1,000 to secure the Option To Purchase (OTP). You then proceed to obtain a valuation from HDB. However, HDB’s valuation is only $480,000. This means you are short of $20,000. The amount you can borrow also reduces because the bank will loan you a lower amount based on the lower valuation due to the loan-to-valuation (LTV) limit. For some buyers, this may be a dealbreaker as they simply do not have the cash to complete the transaction, and thus have to forfeit their option.
Sellers Can Also Be Affected By The Current Process Of Valuations
Conversely, sellers may also be affected. While the daily prices of resale transactions as soon as they are registered, the prices do not show how much COV was paid for these transactions. Most sellers take reference from the recently transacted prices in order to price their flat for sale. If these prices include a COV component, the seller may experience some shock when a potential buyer suddenly pulls out from the transaction because the valuation is lower than expected. Additionally, as the valuation is obtained by the buyers only, sellers may not be privy to the information until the transaction is cancelled.
In a sellers’ market, there may be future buyers who may be willing to pay the higher COV and match your expected price. However, if you are in a hurry to sell, the first or fastest buyer may not be willing to pay that COV and you may have to settle for a lower price.
HDB Provides The Official Valuation For HDB Flats
While the actual valuation that banks use to determine the LTV has to be conducted by third-party professional valuers for private property, HDB has its own panel of professional valuers who conduct the HDB valuation.
Factors that may affect valuation include prices of recent transactions of similar properties in the vicinity and the condition of the flat. In general, resale flats in mature estates are likely to fetch a higher valuation.
Due to the opacity of the valuation process and the fact that only buyers are allowed to obtain a valuation after paying their option fee, there are possibilities for mispricing. The 2014 change in the resale process has helped to curb the excessive COVs. However, the current process where buyers and sellers agree on a transaction price but may be surprised by a low valuation is a new problem that HDB may need to look into.
With a record number of flats transacted above $1 million in the first half of 2021, we may wonder how much COV is paid for these flats. Well, unless you are the buyer or seller of these flats (or HDB), you may never know.
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