At the end of last year, real estate agents made us aware of the problem of the increasing cash over valuation (COV) in resale flat-rate transactions. As of last week, news reports seem to confirm that COV is indeed sneaking back into the market.
This is enough to scowl on the faces of most buyers. The higher spending monster is back, and we don’t know if it will last.
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Here’s what you need to know if a resale home is part of your home plan this year:
What is Cash Over Valuation and why is it important?
Please see our previous article for full details. As a brief summary, the COV refers to any amount that is above the resale apartment rating. For example, if the resale apartment is worth $ 500,000 but the price is $ 525,000, the COV is $ 25,000.
COV can seriously affect resale home buyers as it is never covered by an HDB or bank loan. If you have to pay COV, it has to be in cash. This can result in real estate costing more money than originally expected.
How much COV can we expect to pay?
Unfortunately, there is no other data source than hearsay or word-on-the-ground. This is because HDB decided back in 2014 to stop publishing COV rates. This was specifically done to discourage COV.
If anyone out there knows the actual COV numbers, it’s likely a government agency; and there’s no chance they’ll reveal it.
So while new MOP-ed apartments (< 6 years old) did see a jump in price (namely due to the larger volume from new Punggol and Queenstown HDBs), the overall volume compared to the entire resale market is still considered small – hence the “overall” price trend mimics that of flats >= 6 years old than those who are <6 years old.
2. The endeavor to upgrade also leads to higher offer prices
We would think that as the resale supply increases, the COV has little chance of increasing. However, some agents have suggested that this may be less contradictory than it seems.
More homes that achieve MOP also mean a greater percentage of upgrades. Since 2018, credit restrictions have increased the minimum down payment required to buy a condo. The minimum deposit is now 25 percent (five percent cash and 20 percent CPF).
In addition to the credit restrictions, resale home sellers are required to return their used CPF funds including accrued 2.5 percent interest. This increases the possibility that after the seller has sold their home, they will not have enough to cover the minimum money for their new home.
As a result, sellers will seek a higher bid price to cover the difference and this can result in a COV. Given the larger pool of upgrades, we would then complete more transactions with COV.
3. Grants and programs that prop up prices for older resale homes
In May 2019, the government introduced several policy changes to support older resale flat rates.
These include a more liberal use of CPF money to buy resale homes (assuming the lease lasts until the youngest buyer is 95) and full funding (up to 90 percent of the flat rate or value, whichever is lower is), provided that the minimum rental period is met.
Note that many high quality apartments, such as B. Jumbo apartments, maisonettes and older units are. It’s not uncommon for some to be 40 years or older. The policy changes coupled with the high asking prices already associated with these rare properties can help maintain high COV rates.
In addition, some representatives expressed the view that the measures adopted in 2019 should always lead to an increase in the resale flat rates. and that it just takes almost a year to take full effect.
They indicate that after nearly seven years of consecutive decline, resale flat rates have changed, reflecting the impact of policy measures.
This goes hand in hand with the increase in newer resale apartments (see point 1), which leads to a general increase in the entire real estate segment.
4. Buyers tend to be more urgent than sellers
Few homeowners in Singapore urgently need to sell. Even at the height of the pandemic in 2020, government measures like mortgage relief ensured that few fire sales were made.
However, buyers tend to be more urgent. With Covid-19, fewer buyers want to take the risk of construction or renovation delays. Real estate is also more difficult to look at and select houses, and even show homes are tightly regulated.
