Cash-over-valuation (COV) figures will no longer be part of the negotiating process for Housing Board (HDB) resale transactions, as buyers and sellers will now have to agree upon a price first before getting an official valuation. The change took effect from 5pm on Monday.
The move will restore the original intention of valuation, which is to help buyers get a housing loan, said National Development Minister Khaw Boon Wan, who announced the change during the debate on his ministry’s budget on Monday.
We look at five things you should know about COV, which has been a hot topic:
What is COV?
COV is the cash premium that buyers pay in excess of the valuation of an HDB flat in the resale market. This occurs when buyers choose to pay more than the market value of the flat as determined by an HDB panel of independent professional valuers.
The COV is not mandatory in a resale transaction and the HDB does not determine the resale price, which is agreed upon between a willing buyer and a willing seller.
2. Why is COV important?
COV affects the price of a resale flat. It has to be paid up front in cash as the amount the HDB or the banks will lend is based only on the flat’s valuation.
COV payments can rise sharply in a booming market. The median cash premium soared to a record high of $36,000 in the third quarter of 2011, according to Singapore Real Estate Exchange (SRX) figures.
But it has been falling in recent times, dropping to zero last month, following a series of property cooling measures introduced by the Government, including loan curbs, and more new flats being built.
3. What determines COV?
Location and condition of a flat are some factors that could affect COV.
According to the latest SRX flash figures released last month, 12 HDB towns had zero or negative median COV, and most of them were non-mature ones. In Sengkang, for instance, 20 deals – about 70 per cent of that month’s total – closed below valuation.
But there are exceptions, especially for flats which are in the more sought-after estates, or those located near amenities such as an MRT station.
For instance, a five-room flat in Clementi went for $110,000 over valuation last month. In Bishan, the median executive flat COV was $61,500.
Valuations may also have an impact on COV levels, said analysts. With valuations, which are based on recent transactions, expected to drop, buyers may not press for negative cash premium.
4. What is the problem with COV?
Some have suggested scrapping COV because it contributes psychologically to rising HDB resale prices, especially in a booming market.
Instead of using the official valuation as a guide, some sellers use COV as a benchmark and mark up their prices above it. As a result, potential buyers who are not cash-rich may find it hard to afford resale flats.
Some analysts also feel that resale flat transactions should look at one price which incorporates the cash premium, much like how private property transactions are conducted.
Previously, HDB flat sellers usually got valuations first, and then negotiated with buyers over COV. But negotiations should “rightly” be based on recent transaction prices, not cash premium, Mr Khaw said on Monday.
5. Should COV be scrapped?
While some have called for COV to be scrapped, others pointed out that it remains relevant because it discourages buyers from committing to overly high prices as they have to fork out a large cash portion up front.
Some also argue that the HDB resale market is a free market, and should be kept that way.