Willing buyer, willing seller - few people get fazed when private properties change hands this way.
But unhappy HDB flat hunters, clearly not in the 'willing buyer' category, have recently complained about the affordability of public homes as resale flat prices go up, up, up.
This is because these days, the agreed price for an HDB resale flat typically includes a cash premium on top of the official valuation determined by an HDB panel of independent professional valuers.
Any premium - known as the cash over valuation (COV) - above this valuation has to be paid upfront in cold cash. This favours a buyer who is cash-rich.
A Straits Times Forum writer has even called for a ban on such cash sums.
The COV premium emerged because buyers chose to pay more than the market value of the resale flats. It is not imposed by the Government.
There are some deals done below valuation but most HDB flats have not been immune from the current rising property market: Strong demand and low supply lead naturally to substantial rises in COV sums.
How high are COV sums now?
COV sums reportedly doubled in July this year, to about $10,000-$15,000 for five-room and executive flats, from a median level of $5,000 in the second quarter.
The rise is still gathering pace, with experts saying they are seeing more deals done at higher COV sums.
In popular towns such as Bukit Merah, Ang Mo Kio and Sengkang, sellers always ask for upfront cash, that is, COV, they said.
For instance, in the Jalan Bukit Merah area, one four-room HDB flat seller is asking for a COV sum of $45,000 on top of the $440,000 valuation.
Classified advertisements for HDB resale flats in Sengkang show 'asking COV' of $38,000 to $45,000.
Meanwhile, the latest HDB data, which is for the second quarter, still shows the median overall COV for flats in Bukit Merah and Sengkang to be zero.
Experts say the pick-up in the HDB market intensified only in the past few months. And the optimism seems to have spread to farther-out towns.
Last week, the seller of a high-floor Bedok North executive flat received an offer from a buyer keen to pay a $58,000 COV sum on top of the $520,000 valuation - after just the first viewing.
PropNex data for last month showed that a five-room flat in Punggol went for $450,000, including a COV sum of $70,000, while an executive maisonette in Pasir Ris went for $580,000, including a $65,000 COV sum.
ERA data showed deals done with COV sums of $60,000 in Choa Chu Kang and Jellicoe Road, though the firm said the majority of its resale deals done above valuation were sealed at more reasonable amounts of $15,000 to $30,000 above valuation.
When did buyers start paying COV?
In the private market, if buyers pay more than what the bank thinks the property is worth, they also have to fork out the extra sum in cash.
In the public housing market, COV emerged when HDB announced that it would arrange for valuation of all resale flats for the purpose of mortgage loan financing, said the CEO of C&H Realty, Mr Albert Lu.
That was in 1993. Prior to that, the maximum loan quantum was pegged to the HDB's 1984 posted prices.
A decade later, COV largely disappeared for a while when the private banks got into the HDB loan market. The banks were 'very willing' to match the HDB sale price when they got in and competed for loans, and as a result there was no COV, Mr Lu said.
But that had its own problem. Prices shot up and an illegal cashback practice - in which a flat's price is inflated so the buyer can get a bigger housing loan - became rampant, he said.
As a result, in 2005, the HDB stepped in and made it compulsory for banks giving loans on Housing Board flats to use valuations only from the HDB's panel of approved valuers.
The HDB and banks provide a housing loan of only up to 90 per cent of the market valuation or the transacted price for HDB flats, whichever is lower.
An HDB spokesman said the cap on the loan quantum is a prudent measure required by regulators.
'It helps to protect the lender by providing a buffer so that a drop in value of the property will not immediately result in negative equity (the outstanding loan amount exceeding the market value of the property).'
He added that it is also in the interest of the flat buyer, as liberal credit will generally fuel price increases.
The headline-grabbing COV sums started to be noticed only during the market run-up in 2006-2007, said ERA Asia Pacific associate director Eugene Lim. During that time, some buyers were willing to pay COV sums of $100,000 to $150,000.
The HDB recommends that sellers do the valuation upfront before selling their flats, so that they know their properties' market value.
Mr Lim said this is to help the seller set a reasonable selling price. But sellers will naturally want to get a COV sum, the higher the better, he said.
Is COV necessary?
'I do not think COV is a good idea as the valuation has already taken into account the property's attributes like its location, condition and any renovation done,' said Mr Lim.
This is particularly so when HDB resale prices are at a new peak, he said. HDB resale prices are at a record high, after rising some 35 per cent from the start of 2007.
'With COV continuing to increase, it does signal more investment in the HDB market,' said Mr Lim.
'But it takes two hands to clap. There has to be a willing seller and a willing buyer.'
In a way, the COV measures how overvalued an HDB flat is, given that the HDB or the banks will lend based only on the valuation. It is then up to the buyer to decide if he wants to buy the flat.
Mr Lu doubts sellers will stop asking for COV in the near future, 'unless we see another economic crisis (that is, a double dip) or a major disease epidemic'.
COV did disappear towards the end of last year when many large HDB flats were sold at or below valuation, he pointed out.
It will be hard to get rid of COV, as it is all a matter of supply and demand, he said.
'Right now, COV has gone up because of high demand and low supply.'
Ultimately, the buyers have a choice. 'They can always walk away if the COV sum is too high,' said Mr Lim, adding: 'At the end of the day, you are buying an HDB flat. Why pay so much cash?'
Source: Sunday Times, 13 Sep 2009
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