SINGAPORE- After hitting record highs in previous years, cash premiums for Housing Board flats are tumbling.
From $35,000 in January last year, median cash-over-valuation (COV) across Singapore plummeted to $5,000 in December. And more flats are commanding no premiums at all, or going for less than their valuation.
Should this be any cause for alarm?
No, say experts. First, for a large proportion of the population, it is obviously cause for celebration instead.
“To the buyer, it’s good news,” notes SLP International Property Consultants head of research Nicholas Mak.
COVs have to be paid in cash, so the high premiums of earlier years made HDB resale flats hard to afford. With that initial financial hurdle now eroded, buyers today are in a much better position.
Those previously put off by high COVs might well return to the resale market – as experts expect them to do – later this year.
Second, the fall in COV is generally less alarming than movements in resale prices themselves. Experts say low and negative COVs will cause valuations themselves to come down, but only gradually.
“Unless there is a sharp drop in valuation itself, this is not a worry,” says Century21 chief executive officer Ku Swee Yong.
A flat’s valuation accounts for the bulk of its resale price. And resale prices have been falling by only about 2 per cent each quarter, notes Mr Ku.
“I think that is the sort of slow drop that the Government is happy to see,” he adds.
What about HDB flat sellers, who seem to have the most to lose from falling COVs?
Well, given that flat prices have probably appreciated quite a lot since these sellers bought their units, Mr Ku thinks they have little to complain about.
The resale price index went up 100 per cent in the last six years, he observes. Now, it has merely edged down a few per cent.
“You’re still making a profit,” he says. “You’re just making less of a profit.”
Mr Mak notes that some sellers could admittedly be in trouble if they were making future plans “counting on a high COV”.
For instance, they might have bought a condominium two years ago, based on the expected proceeds from selling their flat.
Now, if these people are about to sell the flat and collect the condo keys, they might find themselves short of cash.
But the mistake, says Mr Mak, was banking on that high COV to begin with.
“Perhaps we can draw a lesson from the recent trend of HDB resale prices and COV, and that is that property owners should not expect the values of their properties to be immune to price correction,” he adds.
Experts say that sellers have to accept that things have changed.
In today’s market, with tighter home loan rules restricting what buyers can afford, “sellers have to become more realistic if they want to sell their flats and move on”, says ERA Realty key executive officer Eugene Lim.
“If you were to stubbornly hold out for a high COV, you may not find a buyer at all,” he adds.
R’ST Research director Ong Kah Seng sees a new, low-COV norm on the horizon.
With COVs now so low, sellers no longer see them as a major source of liquidity, he says. And since they have lost that significance, they are more willing to accept a low COV.
By the end of the first quarter, Mr Ong expects flats in far-flung locations to be offered at slightly below their valuation.
Those in mature estates and good locations will be sold at around valuation price, commanding either zero or “a few thousand dollars of COV”.
If this sounds bleak, let us keep in mind that – by definition – the COV is a bonus paid above what the flat is intrinsically worth.
High premiums are a sign of a seller’s market, with more demand than supply. A zero COV, in contrast, indicates that a flat is sold for what it is worth. You can’t say fairer than that.
(Source: The Straits Times)