By Paul Ho (Guest Contributor)
On March 10 2014, the Ministry of National Development (MND) issued new rules on HDB resale procedures. As usual, the headline is almost the same: “A stable housing market, better homes for all.” How ironic!
Over the following two months, we have observed how this new rule has affected the market, and will share our views in this article.
Overview of the past practices and current rules
Here is an overview of the property purchase process under the old system and the current rules:
Before March 10 2014
- Property sellers obtain a valuation report
- The property buyer and seller agree on a price based on the valuation, i.e. cash over valuation, at valuation or under valuation. For example if a unit is valued at $350,000, if buyers and sellers agree on $20,000 above valuation, the transacted price will be $370,000.
- The buyer pays for an Option to Purchase (OTP) and exercises the option
After March 10 2014
- Property transactions must use the new OTP form
- The property buyer and seller agrees on the price
- Property buyer pays a deposit for the Option to Purchase (OTP)
- Once an OTP is obtained, buyers and sellers can seek a valuation.
What is the impact of such a measure?
Cash-over-valuation was previously criticized as it gave the impression that the valuations of HDB flats were “micro-managed”.
For example, how could the valuation be correct if the Cash Over Valuation (COV) is consistently different from that of the official valuation by a large margin and for an extended period of time? Would it not make sense for the valuation to eventually catch up based on large COV premiums or discounts? If the valuation did not catch up, would it not give the impression that the valuations are somehow managed? But if it was managed, by who?
So the question is: Would it not make more sense that the valuations should catch up with actual transacted prices, thereby eliminating the need for COV totally? Based on this, we support the MND’s stand of removing Cash Over Valuation or Cash Under Valuation as a mechanism for determining the property price.
HDB to provide recent 2 years of HDB flat transacted prices
In its place, HDB will announce the recent two years of HDB flat transacted prices more frequently. So property buyers can then make a more informed decision.
However, we understand that the market is currently chaotic, which runs counter to the aim of “a stable housing market, better homes for all.” This is because many HDB buyers are not even sure what the prices should be. Worst still, they may approach a seller’s agent who will sometimes discourage the property buyer from co-broking, citing that prices may become higher if they engage a buyer’s agent. So what then is an appropriate price to offer?
Market practice of Singapore private property transactions
Whilst it may not be the proper valuation practitioner’s process, asking for a “desktop” valuation for a property is the market practice. This serves to ensure that the buyer can find a bank that can back up the valuation of the property and agree to the home loan financing.
If the seller offers to sell at $500,000, you agree on it. Then you go to seek a valuation, only to find out that the valuation is $450,000. The buyer will have to find CASH for this extra $50,000. This is effectively a Cash Over Valuation. If the buyer is not prepared for this surprise, the buyer will have to forfeit their Option To Purchase deposit.
The new rules thus serves to create doubts for buyers and artificially halt demand in the form of regulatory impediments to the market.
Potential for more fraud and a proposal
Property sellers and buyers may then be encouraged to enter into private agreements to alter the Option To Purchase by redoing it or by making private arrangements and adjustments in prices. This is even more dangerous and fraught with potential monetary losses and fraud, and does nothing to create a stable and sustainable housing market.
Perhaps one way is to keep the previous process, but allow the valuations to be based on a three month or six month moving average, such that over time, the valuations will rise to close the gap with asking prices.
By Paul Ho, holder of an MBA from a reputable university and editor of www.iCompareLoan.com, Singapore’s first Cloud-based Home Loan reporting platform used by Property agents, financial advisors as well as Mortgage brokers.