Cash over valuation

Cash Over Valuation (COV) is the cash paid upfront by a buyer over a flat's valuation. It is often an indication of demand levels of resale flats. An increasingly buoyant market will be indicated by soaring premiums across numerous towns.

Both sales and prices of public housing flats on the resale market are up in Singapore. The Housing Development Board (HDB) says:

Resale transactions rose by about 7 per cent, from 8,484 cases in the first quarter (January to March) of 2010 to 9,114 cases in the second quarter. However, this is about 11 per cent lower than the 10,184 resale transactions in the second quarter of 2009.

Resale activity keeps growing and the prices of resale HDB flats hit new high in 2nd quarter of 2010. Almost every flat was sold above valuation. This is a 20% increase from $25,000 in the first quarter. The resale prices for HDB flats have smashed records for the eighth straight quarter with a surge of 4.1% in the April to June period.

Peaks: 2008 and 1996. In 2008, prices passed the 1996 peak, and it has overtook it since then.As of Jul 2010, resale prices are almost 18% above previous peak in the last quarter of 1996.

As HDB says:

The median Cash-Over-Valuation (COV) amount amongst all resale transactions increased to S$30,000 in the second quarter. The proportion of resale cases transacting above valuation also increased to 96 per cent.

Here's the HDB chart showing the COV for different types of flats in various public housing estates.

Agency data shows that executive flats in estates such as Bishan and Toa Payoh are selling at a median COV of $55,000 to $65,000 respectively.

The Bishan figure is striking as it was only $40,000 in the official first quarter figures. The Toa Payoh median COV then was $63,500.

Median COV levels for four-roomers in the second quarter ranged from $20,000 in Woodlands to $42,000 in Queenstown according to agency data.

The official HDB figures for the first quarter had the range at $21,000, also in Woodlands, to $36,500 in Bukit Timah.

Agency numbers showed Bishan, Toa Payoh, Queenstown and Marine Parade are the red-hot estates, while there are still bargains to be found in Sembawang, Choa Chu Kang, Pasir Ris and Jurong West. The median COVs in these areas have generally stayed around $20,000.

The HDB reiterated yesterday that it is ramping up supply of new flats from 9,000 last year to 16,000 this year to help relieve pressure on the resale market and stabilise it.

Ngee Ann Polytechnic real estate lecturer Nicholas Mak said the effects of the fresh supply will be felt in the medium term, and that prices and COV levels might inch up further before stabilising.

While first-time buyers might feel the pinch of rising COV levels, some home owners are cheering.

HSR property agent James Choo, 47, said he recently sold a five-room Tampines flat for a couple in their 40s for $480,000 – $80,000 above valuation.


The median COV is a mid-point of all the COV during the period analysed - Half the units were sold for a COV above the median value, and the other half below. The Straits Times has compiled median COV figures by flat type and estate based on the agencies’ second-quarter sales to get a snapshot of the market ahead of the official statistics out next week. These agencies – PropNex, ERA Realty, HSR Property and ECG Property – make up almost the entire HDB resale market share. The figures show that median COVs of three-, four-, five-room and executive flats in many estates are now $30,000 to $40,000. They were mostly below $30,000 in the first quarter.

Median COV reached $30,000 even as supply of new flats increases. Transactions hit 9,114 in the 2nd quarter, up 7% on the first. The percentage of resale transactions done above valuation increased to 96% from 93% in 1Q2010.



It noted that as COV is the result of negotiations between willing buyers and sellers, ‘in any market at any given time, there will be high COVs, low and even no COVs. Analysts said that high demand amid tight supply is driving up the cash premiums. Others attributed rising COVs to the ‘sell high, buy high’ phenomenon gripping the resale market.

This means that upgraders and downgraders are selling their flats at high prices and asking for high COVs because they face the same demands when they go into the market to buy.
‘This is a case of the cat chasing its tail and prices are spiralling upwards due to this situation,’ said ERA Asia Pacific associate director Eugene Lim.

PropNex chief executive Mohamed Ismail noted that there is now ‘a lot of lateral movement in the market from upgraders and downgraders’, with first-time home buyers mainly left out of the action.

‘These buyers are queueing for flats directly from HDB, which are more affordable. The resale market is also propped up by PRs who cannot buy new flats, but need a home urgently,’ he added.

‘The sellers were very happy as they could downgrade to a three-room flat with the proceeds and buy it without any loans,’ he said.

Still, analysts say there will be a resistance level where buyers will stop buying if COVs get too high.

‘This could be above the $35,000 median COV level,’ added Mr Mak.

a ruling introduced in March 2010 requiring home buyers who want a second HDB loan to plough back half their cash profits from the sale of the first flat.

Mohd Ismail, CEO, PropNex, said: “Even if anyone who makes a S$100,000 profit, you have to plough back S$50,000 into the new flat and you’re only left with S$50,000. And with that S$50,000, if you pay a high COV of S$40,000, you are left with nothing.”

Mr Ismail added that the market is showing signs of resistence and expects the COV to hit a threshold of S$40,000.
Market watchers noted that many buyers and sellers now treat the COV as part and parcel of any resale transaction.
And this is not healthy for the market in the long term.

Mr Ismail added: “During the previous peak in 1996, there were people who paid well above S$100,000 COV for a house. We had a house at Yishun, valued at S$510,000, and somebody paid S$135,000 cash. Today, even though the HDB prices are at their peak, in terms of price index, such houses are still below water.”

Given the positive economic outlook, analysts expect prices to continue climbing.

The Housing and Development Board (HDB) said it’ll ensure that there’s an adequate supply of new flats for first-time buyers.

In the first half of 2010, HDB launched 9,000 new flats and this number is equal to the total supply in 2009. Another 7,200 flats will be launched to meet demand in the second half of 2010.
In July 2010, it will launch 1,000 new flats in Jurong West and Bukit Panjang.

The total home supply will be complemented by 4,700 new homes under HDB's design, build and sell scheme (DBSS) and recently sold executive condo (EC) sites. They are in locations such as Woodlands, Yishun, Punggol and Sengkang.

In estates like Queenstown, the median resale price for an executive flat was at $781,500 and $685,500 in Bishan in 2Q10. Resale price for 5-roomers was $682,500 in Marine Parade and $675,000 in Bishan.

Though public housing is supposedly reserved for Singaporeans only, PRs are allowed to purchase HDB flats in the open market. As many PRs are already well-established professionals to begin with, they are able to pay higher than market prices for the resale flats thereby jacking up the prices in the process.

A Straits Times article last year reported an Indonesian PR who forked out a shocking $653,000 for a 4-room resale flat in Queenstown though he could well afford a condominium.

Many PRs also see HDB flats as an investment which they can make a quick buck by selling them upon leaving Singapore.

Besides PRs, some new citizens have also benefitted from the PAP’s pro-foreigner housing policies by subletting their flats while staying in private properties.

Chris Koh, director, Dennis Wee Group, said: “Private property prices are very high today and because it’s so high there are a lot of people who are now turning to the HDB market.”

The high demand also sent the cash-over-valuation or COV upwards.
96 per cent of transactions in Q2 were above valuation.

Questions to ponder:
Price increases may appear to be supported by strong economic fundamentals for now, with demand coming from upgraders, downgraders, PRs and home buyers who cannot wait three years for new HDB flats. There is still concern of whether the real estate market in Singapore is overheating.
- Government's anti-speculation policies on resale flats.