COVs: Does Mah Bow Tan know what he is talking about?
OPINION
There is much debate recently if cash-over-valuation (COVs) are squeezing ordinary Singaporeans out of the resale market.
With the prices of resale HDB flats hitting a record high in June 2009, sellers are capitalizing on the inflationary market by asking for ridiculously high COVs.
A 30 year old 3-room flat at Toa Payoh was recently transacted at a COV of $70,000.
As buyers will have to pay at least 10 per cent of the flat’s valuation upfront in cash, they may end up paying more than $100,000 as downpayment for a HDB flat if COVs are included.
Despite the rising concerns and disgruntlement on the ground about COVs, the official stance from HDB is that they have no right to intervene to scrap or place a cap on COVs since it is the pregorative of the seller to decide on it.
In parliament two weeks ago, National Development Minister Mah Bow Tan was asked if there are any alternatives to COVs.
Mr Mah explained that cash over valuation was not unique to HDB flats, but part and parcel of today’s property transactions – whether private or public.
There is a factual inaccuracy in the above statement. COVs are only unique in the resale HDB market. Buyers of private properties are required to pay up to 20 per cent of the property’s value in cash, but that is not COV.
COV is additional cash demanded by the seller on top of the valuation of the HDB flat. For example, for a 4-room flat is priced at $400,000, the buyer needs to pay $40,000 directly to the seller (5 per cent must be in cash, the rest in CPF) while taking up a loan of $360,000. If the seller asked for a COV, it is considered as an additional “premium” to pay in order for the buyer to secure the deal.
There are no COVs in the private property market. One simply pay the agreed price for the property. The buyer need not pay extra cash to the seller in the form of COV.
Mr Mah also claimed that almost a third of the resale flats are sold at or below valuation:
“Buyers can choose not to pay a cash over valuation. And in fact, the latest data shows that almost one third of transactions today are transacted at or below the valuation. So cash over valuation is not a forgone conclusion. It’s not evident for all transactions.”
Another interesting statistic in the ERA report was how 86% of ERA’s HDB recent resale transactions were concluded with Cash-Over-Valuation (COV). This number seems to come into conflict with what Mr Mah Bow Tan said recently about a third of HDB resale transactions are done at or below valuation.
According to figures released by HDB for the second quarter of 2009, the median COVs for both three room and four room flats is $5,000 while it is $0 for five room and executive flats. (Source: HDB)
The reason why there are few COVs asked for larger-sized flats is probably because of their already high prices. However in the last quarter of 2008, the median COVs for 5 room and executive flats are $11,000 and $15,000 respectively.
Given that the 2nd quarter marked the bottom of the property market, we should expect the median COVs to rise during the third quarter. As Mr Mah did not quote any specific study or source, it is unsure how he arrived at the conclusion that a third of the HDB resale transactions are done at or below valuation when data from HDB seemed to suggest otherwise.
Even then, the majority of flats transacted at or below valuation are likely to be 5 room or executive flats which cost more than $400,000. Is Mr Mah asking Singaporeans to fork out more money to purchase larger flats than they need?
For young couples without children who earn more than $8,000, they will have to fork out a hefty COV for three or four room flats in today’s market unless they opt for 5 room and executive flats.
Besides, at today’s astronomical prices, even flats sold at or below valuation are considerably more expensive than those sold in the same estate the year before.
Unless first-time owners have enough cash to pay for the COVs, they are unlikely to obtain a flat of their choice.
Mr Mah had urged Singaporeans to be less “selective” and be more realistic when purchasing HDB flats. However, is it fair to expect Singaporeans to lower their expectations when they are paying so much for a flat?
Unlike in the past when the mortage loans for HDB flats can easily be repaid within 10 years, Singaporeans have to work for their entire lives in order to pay up the 30-year loan in full at current prices. It will be an unthinkable disaster if they are retrenched or fell ill during this period of time.
The government can do much more to control the rampant rise of COVs by either putting a cap on it or scrapping it altogether. Leaving it entirely to free market forces will only lead to widespread inflation by greedy sellers eager to capitalize on their flats.
HDB has already imposed many restrictions on the sale of HDB flats such as the 5-year minimum occupation period, ethnic quota in each block of flat and a resale levy on those who downgrade to a smaller flats and so it is perplexing that they can’t do something about the COVs.
The primary purpose of HDB is to help Singaporeans own a home of their own at affordable prices and not to ensure that home owners make a hefty profit from the sale of their flats via COVs.
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csl on Fri, 2nd Oct 2009 9:19 am
Mah could be referring to buying new flats. The number of new flats in district 9, 10, 11 are limited and thus if anyone wants to live there then you will have contend with the high demand and low supply.
There was a problem with building up Jurong West extension (the sua deng of Singapore) and Yishun then Woodlands (Admiralty and other places). Satellite towns have sprouted up there after a while and many young couples live there and raise their families there. Now its Senkang & Punggol. Already the resale prices there are reaching the national averages.
3 point plan to curb the HDB resale and 1st sale prices.
1. Change the pricing scheme. Using resale prices to determine market value inflates the prices unnecessarily. A better formula should be used to determine real value.
2. Increase the number of years before resale to 8. 5 year old flats can only be sold back to the HDB if and only if the owner upgrades. Since people who do that currently can still get a grant that current ruling stays.
3. Agreed price that is higher than valuation can only have the same deposit paid in cash. The shortfall after deducting bank loan and in cases which apply grant will be deposited into the seller’s CPF accounts. Joint name owners will split the amount according to payment share.
HDB also has to step up with redevelopment and revitalizing of current mature and approaching mature age estates. Push out some new flats so that people who want to stay near their parents can have priority and some choice. Sure its not 9, 10 and 11 but those who want to stay near their parents will have choice. I still say this, you can choose not to stay in 9, 10, 11 its really up to you.
BuiTaHan on Fri, 2nd Oct 2009 9:49 am
MBT is not doing his job well and caused the properties skyrocketed to the level intolerable to the ordinary citizen. Now, he is talking rubbish to protect his own mistakes. He should talk more to his colleague who is in charge of immigration, to make sure the number of new flat that he is making available is in sync with the number of newcomer to the country.
meme on Fri, 2nd Oct 2009 10:09 am
Commercial Real Estate Market Melting Down
October 1, 2009 (LPAC)—With the value of commercial real estate having fallen some 40% from its peak in late 2007, the commercial real estate market is beginning to disintegrate. One of the biggest problems facing the owners of office towers, shopping malls, and apartment complexes, is that the values of their properties have fallen so far that they will be unable to refinance their loans when they come due. The situation is so dire that the market values of some major office buildings have been cut in half, and major developers and property companies have already begun to default. Tishman Speyer, a major New York City property owner, is an example. The firm and some partners bought several major properties at the peak of the market, and are now losing billions of dollars on the deals.
This will only get worse, as the economy collapses. The commercial real estate business — like just about everything else — runs on borrowed money. Developers borrow money to finance their projects, and property companies borrow money to buy them. Typically, the deals are put together with short-term loans, with the expectation that longer-term funding will be arranged later. In the past, with the bubble growing and the securitization of commercial real estate loans booming, this was not a problem. Giant firms, like Tishman Speyer, and real estate investment trusts — a sort of mutual fund for real estate — grew like weeds, assuming prodigious debts. Now it is all blowing up. The commercial mortgage-backed securities (CMBS) market is virtually dead except for the purchases funded through the bail-out, and the banks have barely begun to write down the values of their $1 trillion or so in real estate loans.
The collapse is across the spectrum. Shopping malls and strip centers are tanking as consumer spending plunges. Office buildings are taking a beating as companies cut back on employees, or simply go out of business. Apartment complexes and other commercial residential properties are hard hit by the job cuts.
In the past, commercial real estate values were kept artificially high through easy credit — pumping up the values, and keeping them up, was a major facet of the bubble, and a major feeder for the derivatives market; but that game has ended. The banks now have neither the intent nor the money to refinance the real estate bubble. The bankers and the property owners are desperately trying to keep this disaster hidden, but they will fail. This turkey is finished
meme on Fri, 2nd Oct 2009 10:11 am
Commercial Real Estate Market Melting Down in US
http://cecaust.com.au/main.asp?sub=articles&id=2009_10_01_real-estate.html
Googler on Fri, 2nd Oct 2009 10:13 am
Admin,
It is incorrect to say COV does not exist for private residential transactions. The property will have a valuation from a valuer, for which a mortgage bank will finance up to 80%. If the transacted price is higher than the value given in the valuation report, that excess will not be financed by the bank.
The Singapore Daily » Blog Archive » Daily SG: 2 Oct 2009 on Fri, 2nd Oct 2009 11:11 am
[...] Swamp: Rising HDB flat prices due to “unrealistic expectations”? – The Temasek Review: COVs: Does Mah Bow Tan know what he is talking about? – The Temasek Review: Mah: “Not meaningful” to compare to prices of flats in the [...]
Mah Na Bo Le' on Fri, 2nd Oct 2009 12:38 pm
The answer to the Headline in this article by Minister MBT, PRs and Foreign-born New Singapore Citizens is :
Yes
The answer to the Headline in this artile by true blue Singaporens can be summed up in 3 words :
NO
NO
NO
If we put him to a test, Minister MBT would score an A1 for NOT listening / understanding the reality of the situation. He should walk the ground more often rather than sit his fat bum in air-con comfort.
If we grade him for Job Performance, he would get an F9 +++.
S$$$ million salary… Any fool can do a better job.
reader on Fri, 2nd Oct 2009 3:20 pm
I am actually quite disturbed how so many people think COV is the problem.
A valuation is only an arbitrary number decided by banks or HDB. COV is thus the discrepancy that exists between the valuation and REAL market prices.
In other words, high COVs only reflect the reality that either valuations are too low, or market prices are very high. In this case, the latter is true.
Let’s imagine what would happen if the govt outlaws COV. Essentially the govt will be FORCING sellers to sell at arbitrary valuation prices. The following 2 scenarios will result.
1) Sellers refuse to sell at low & arbitrary prices. A housing shortage can happen.
2) A black market emerges where people still pay COV secretly. Taxpayers’ money is wasted to detect and catch these “criminals”.
Another suggestion I’ve heard before is that we should allow loans to include COV too. This 2 scenarios will result.
1) Banks/HDB charge higher interest rates to account for the higher risks involved with COVs. People end up paying more.
2) More people can “afford” high COVs as they can now get financing for it. As a result, there is higher demand, and COVs are pushed up even further to reflect the new equilibrium. People end up paying more.
Hence we can see that allowing financing for COV is not helpful at all and it just makes people take up more debt. Govt intervention in market prices (COV) is also not feasible, as the free market will respond in undesirable ways.
To solve the problem of high COVs, we really need to go back to the root. Address the demand & supply issues of housing, as well as the spiral price chasing issue, and high COVs will vanish.
mama on Fri, 2nd Oct 2009 4:19 pm
Of course singaporean have to made a profit when they sell to PR /FT nothing wrong have COV . But we need to provide our citizen with affordable flats from HDB for 1st time owner this is what a good GOV have to do .Of pte apt have COV , when bank value your apt less than what u pay the excess is COV.
cy on Fri, 2nd Oct 2009 4:26 pm
to reader,
you are right that COV is not the issue here,neither is the 8k ceiling the issue. i have just written on breaking up HDB and inject competition to cure the supply problem in the “No review for $8k ceiling for public housing benefits” article
csl on Fri, 2nd Oct 2009 5:08 pm
@ cy and reader,
COV is not the root of the problem though its abetting the whole situation. I still think that if you want to live in dis 9,10,11 (man I harp about this so much) you pay the price. Yes its silly money region when a 3-room flat there can go at a price where the buyer is willing to go 70,000 over it. Seller laughing his way to the bank but its not really reflective of the value of his flat does it?
Its also not correct to regulate the free market by saying that you cannot sell or buy over the evaluated value of a property. Which is why I did not advocate the removal of COV or buying at higher price than valuation. The extra just has to go into the CPF account limiting the cash the seller gets their hands on.
Selling at prices higher than value just means the seller’s CPF gets a friendly boost by a willing buyer. Which actually could go a long way into making the situation better for the seller.
Final issue though if HDB increases supply which mostly means building in Woodlands, Admiralty, Punggol, Sengkang and other “rural outskirts suburbs” for people. Will they go there? Will they take the flats up? Lets assume that the prices over there is slightly lower 5rm @ 280k. Would like some thoughts on this.
reader on Fri, 2nd Oct 2009 6:52 pm
Dear csl:
I do not quite like the idea of COV going into the seller’s CPF. There is no telling how sellers might react. They may even ask for higher COVs to compensate for the fact that CPF has a lower value than cash.
In any case, I do not see the need to benefit the govt further by having more cash injections into CPF. I still believe it is better to address the root than to tinker with COVs.
You ask if Singaporeans will go for ulu, far-flung flats. I feel the issue is quite complex. Currently, I see 2 main reasons why ulu flats are much less desired.
1) Ulu flats are cheaper, and appeal only to poorer people, who can only take public transport. But as our public transport is taxed to the max with the massive influx of foreigners, travel to the workplace becomes very uncomfortable and time-consuming for them. This hidden cost is what makes ulu flats very undesirable, and improvements to the transport system will go a long way in addressing the problem.
2) Central flats rise faster in value compared to ulu flats. This is definitely true in terms of absolute value, and I believe it is also true percentage-wise. Thus ulu flats make poorer investments.
However, there is a limit to how big the discrepancy between central flat prices vs ulu flat prices can grow. As the discrepancy grows, eventually consumers will just decide that the benefits of central housing no longer outweigh the additional costs.
My conclusion is thus there is no need to worry about the issue. Just keep building flats in the far-flung areas, and an equilibrium will eventually be reached. (But fix the transport infrastructure still!)
Balanced View on Fri, 2nd Oct 2009 11:12 pm
If HDB overpriced?
To me , of course.
But remember , singapore has attracted many PRs and new citizens and rich Foreigner buyers.
Many rich are in town. To these PRs, new citizens or foreigners, i suspect, HDB is cheap. They are not wrong.
To residents of expensive countries like Belgium or Switzerland, if a reporter asks them, is sg HDB cheap, they say yah.
But we must remember to use our brains. These people in these countries are paid very very much higher salaries than singaporeans for similar jobs. These are 1st world countries.
Do they get the same level of foreign worker competition? Of course they have foreign talents. I was there as one. But the issue is the EXTENT.
use the brain! else its tofu.
Kojakbt on Fri, 2nd Oct 2009 11:56 pm
Hi All,
In my view, I think the people are barking up the wrong tree if you want to blame COV for the high HDB resale prices. COV is merely the difference between the real market price and valuation. Since there is a lag between the market price and valuation esp in a rapidly up market, COV will exist. In fact, I suspect Mah Bow Tan may be frantically asking HDB to hold back on valuation to increase COV so as to dampen the HDB resale price rise!
Hence, the real issue here is the rapid rise of HDB resale price in the market. And as we all know, price is nothing more than a function of supply and demand. On the supply side of HDB resale flats, I would say it has been quite stable. The sudden recent rise of the HDB resale price can only be explained on the increase in demand side.
Who can buy HDB resale flats? Other than SG citizens, of course our current policy allows PRs to buy too. Following is a graph of number of PRs in the last 6 years superimposed on the HDB resale index. You draw your own conclusions…
http://i38.tinypic.com/2edr0ie.jpg
(for obvious reasons, I don’t think this is something Mah would want to say in public…)
jk on Sat, 3rd Oct 2009 12:13 pm
for current situation, if COV is scrap,
Cash-back issue will resurface & will only make the overall resale price go much higher & at an even higher pace.
Partly due to the ability to use CPF for repayment, SG home buyer dun think much on buying HDB.
But if without the CPF, end up only the rich can afford to “Buy” a Flat (e.g:HongKong, mostly live in rented flat or even rented bed).
Rental will too get higher, & end up, u pay rental & the flat dun belongs to u. wun that be even worst?
Imho, the problem is caused mainly be the over-import of FT (china, mostly) as i know, only the above middle class china can afford to obtain a SG Passport. They can easily worth 1-2million or more for that class. But 85% of SG are debt ridden & dun even worth 1-2k.
So my POV for the problem on COV is the problem with being over-populated.
BuiTaHan on Sat, 3rd Oct 2009 12:18 pm
The current resale price is already too high that those who bought at this price can only pray that he/she will keep his/her job for another 30 years (is it possible as we have seen three downturns for the past 30 years?) without retrenchment and pay cut. Otherwise, the person will be in deep shit. Don’t assume that the property will go up forever and hope to cash out when you need the money. Japan, despite it strong manufacturing base all over the world, it ’s economy is still weak due to the burst of property bubble in early 90. The question we should ask do we need a government to create problem for us despite their exceptional high salary ?????
BuiTaHan on Sat, 3rd Oct 2009 12:29 pm
We should stop PR for buying public housing unless they have converted to citizen. Public housing should only be allowed for committed newcomer and we are not asking to much from them if you compare those local male citizens who have committed 2.5 years and numerous year of reservist. Singapore has become too convenient for foreigners at the expense of the locals. The government has taken locals for granted because they always think that Singaporeans are like D24 Durian, bao jia !!!!
cat on Sat, 3rd Oct 2009 12:33 pm
cov is a problem because it sucked up the savings of ordinary buyers.
There could be 2 classes of COV. one for PR, one for S’poreans.
TakBolehTaHanLahLAH!!! on Sat, 3rd Oct 2009 1:59 pm
Go to todayonline.com, Page 2 article “PM ‘hopes to’ reveal decision on jobs Crdit on Oct 13″…
He was in meeting with women from 25 organisations and was “peppered” with…” on “The vaunted role of women in Singapore…”…
And he saw his gahmen’s efforts to get couples to have babies (NOT children haw!-that’s THE Problem!) as “ENORMOUS”!!!…
does he and his SUPER-intelligent gahmen have any common sense at all???… TO Just REALISE THAT…
With HDB flat prices having risen more than 10 times… and professional salaries not even risen pass 1.5 times, who HOW MANY CAN AFFORD to HAVE children… AS it takes 25yrs to bring up a child through to college/uni… AND
Singaporeans KNOW THAT gahmen IS CONTINUELY TWEAKING COL (Cost Of Living) but feeding US with LOWER inflation fiqures while BRAGGINg and OSO Encouraging US THAT we’ve grown RICHER in assets and cash TO GO FOR Higher-Standard of Living… Swiss 1986 Or what as Promise by 2nd PM Goh Chok Tong with MORE GOOD YEARS… BUT…
Where AND HOW HAS those MORE GOOD YEARS come to Fruition???… AS A Citizen’s LARGEST SINGLE Expenditure for A gahmen HDB flat HOME Has RISEN MORE THAN 8-10 TIMES then salaries have risen in THE LAST 25 years???…
Has their FINANCE Policies serve US well??? LHL WAS FM for quite a ong time wasn’t he???…
And now to the group of 25 “Women Leaders from organisations who “pepered” him with… he in the end gave a lee-hchia-loong FINALITY to them all… of “We can do more of these measures, BUT I CANNOT STOP BRINING THE PEOPLE IN”… Menaing the FORIEGNERSguys!!!…
Whilst we need them… ISN”T THIS a MOST DIRECT ADMISSION THAT WE ARE BEING DISPLACED… AS…
It was report this week that they only comprise some 25% of our NOW 5 Miliion Population… AND of the remaining 75%… they ARE US… THE NATURAL BORN HERE… Plus The PRs… and Of COURSE The RATIO OF Singaporeans TO PRs WAS NOT Reveal… NATURALLY of THIS pap!!! in pep talks!!!
Do we get the picture??? FTs AND Foriegners ARE here to STAY And ARE TO BE INCREASED In NUMBERS for Our “Hinterland” MARKET Leh you see… BUT THEN…
WHAT USE ARE LOWLY PAID sINGAPOREANS AND FOREIGNERS At-Large GOOD FOR THE HOME ECONOMY???…LOL…LOL…LOL… Another pap Self-CON… Or to bring them in to mostly end up like us too… FOR THE SOLE PERPETUATION OF pee-a-pee???…
In YOU work work work TILL you drop DEAD… DON”T EVEN ASK WHY…AS YOU SURE DON’T KNOW HOW ‘pap eEcooNmics’ work haw!!!
Wah LAu OOi…!!!
contrarian on Sat, 3rd Oct 2009 2:25 pm
The writer is wrong about financing for private residential transactions.
Try borrowing $1,000,000 from the bank when the property’s valuation is $800,000. You’ll soon see that the bank will finance you only up to 90% of $800,000. This leaves $200,000 as the amount that you have to pay in cash. In other words, COV applies to private properties just as it does to HDB properties.
anonymous on Sat, 3rd Oct 2009 5:28 pm
People seem confused about COV. COV isn’t a policy by some agency. It isn’t a scheme introduced by some regulations.
It’s just private settlement between 2 parties in a transaction. Simply, a willing buyer matches a willing seller. If there’s no willing buyer, the seller can’t get any COV.
Anything popular demands a premium. The premium isn’t the COV per se. It’s in the valuation itself which is recognised for use in financial dealings. COV is just the topping to secure the tranaction amid popular demand.
Everybody will have to decide for themselves whether the it’s worth it, and whether they can afford it. It’s the same with any dealings in the market. For example, if you wish to eat rare fruits over the normal variety, then you must be prepared to pay the premium.
First-time Buyer on Sun, 4th Oct 2009 12:38 am
Why HDB can not do anything to COV ?
Because, it’s too late.
If HDB imposes COV restriction (eq. max COB 20k), there would be upsets from people who paid high amount of COV.
For them, it would be very unfair since they have paid the COV. And, this is the problem that HDB can not solved.
MBT sucks on Sun, 4th Oct 2009 3:17 pm
Some Singaporeans has listed MBT as their number one public enemy. Take a look at the HDB petition which exceeded 1000 and still climbing.
http://www.thepetitionsite.com/1/lower-hdb-valuations-or-build-more-affordable-hdb-housing-for-singaporeans#
csl on Sun, 4th Oct 2009 11:56 pm
To Reader,
Its just an idea that I am throwing around. The resale thing breaks the idea of HDB providing properties for end users (you buy one and do not upgrade or switch). My family is considered as lucky whereby we got our current home when it was cheap and we have been here for more than 20 years. In that time JP has gone from tiny little shopping center to the monster it is now.
In the case of our public transport system, it still has lots of gaps to plug in terms of service quality. Peak hour traffic has always been that way. I have worked very near my home once take one direct bus to and fro. That bus is trunk service plying from Clementi to Jurong West extension. Going home on that bus at the end of office hour means a packed bus along the way.
I had also worked at HarbourFront. Needless to say the MRT trip can be a hassle. Now I work slightly nearer but not so near and a ride on the train is required. What I see is that the hubs have reached their capacities already.
Jurong East interchange, Outram Interchange, the two in the city. All are reaching their maximum capacity when it comes to crunch time. The building of Bouna Vista as the next hub should provide a relieve point for Jurong East. Hopefully the circle line will spread out the crowd a little bit more. That and SMRT brings in more trains though that can have little effect since you can only run so many trains all at once.
Perhaps the resale rules have to tweaked a bit. A increase in number of years before the flat can enter will hamper the supply making those on the market worth even more. Decrease it and people go back to the old ways of queuing and selling. As for PRs squeezing people out of their precious D9,10,11 not allowing them to get resale flats there could be an idea worth thinking about. In any case, PR-citizen couples can get new flats. Its only PR-PR couples that have no other choice.
BuiTaHan on Mon, 5th Oct 2009 1:49 am
The property price is controlled by our government by creating a big mismatch between demand and supply. Not only they are to be blamed for high COV, the high valuation price is only created by them. Even with zero COV, a person still have to bear a huge debt burden till the day he steps into coffin !!!!