Falling COVs: A step towards affordability?

Data published by the Singapore Real Estate Exchange (SRX) early this month showed Cash-Over-Valuation (COV) premiums for Housing and Development Board (HDB) resale flats extending their downward trend to hit a four-year low, shining like a beacon of hope to long-suffering buyers.

Sentiment towards COVs, often deemed to be an unfair negotiation tactic employed by property sellers for a quick profit, worsened when news broke several years earlier that a number of resale flats were sold at premiums exceeding S$100,000. This resulted in many clamouring for the Government to take action, with the more vocal ones demanding that the system be scrapped altogether.

The frustration over the payment of what most define to be “ridiculously high” costs on top of a HDB unit’s market valuation cast the spotlight on the concerns over public housing affordability, most acutely felt by young couples and families trying to find a place to call home.

Such is the case in Toa Payoh. A bastion of affordable public housing since the 1960s, it has now earned the reputation of being one of the most expensive districts to buy into, with a number of flats there commanding COVs over S$100,000. Compared to the other uniquely Singapore pricing mechanism — the Certificate of Entitlement (COE) for cars, the COVs for these choice Toa Payoh units consistently outperform.

Falling COVs, therefore, offer hope, especially with analysts predicting further declines. As more resale flats change hands with low or no COVs, prospective buyers are keeping their fingers crossed, hoping that this trend will finally bring down the price of resale flats to reasonable levels.

This is especially so in light of the slew of measures the Government has introduced since the start of the year to tame the property market, with the latest placing stricter controls on purchases by Permanent Residents (PRs).

Will balance be restored to the HDB resale market? Or are we placing blind faith in the downward trajectory of COVs in the hope that positive change will take place in the market?

Based on historical data, it can be seen that while median COVs for resale units have seen a significant drop across the island, the declines vary widely by region.

As seen from Graph 1, estates closer to the city, denoted under the “Central” category, such as Bukit Merah and Kallang/Whampoa, as well as those in the North, such as Bishan, Toa Payoh and Ang Mo Kio, typically tend to attract higher COVs and experience a slower rate of decline.

More specifically, while the Central and the North saw a drop of only 0.25 and 2.94 per cent in median COVs for four- and five- room HDB units, respectively, between the first two quarters of 2013, the East, West and North-Eastern regions in particular faced a steeper drop of between 18.5 and 19.8 per cent within the same period.

Despite the overall falling trend, there is still a marked difference in COV levels in certain areas compared to 2011. Most notable are the patterns seen in both the Northern and Central regions, where the fall in COVs has not offset the rise beginning from Q1 2011.

Currently, the median COVs for the North and Central regions stand at over S$39,000 and S$53,600, respectively, for four- and five-room flats, which are still 51 and 49 per cent more than the base values of COVs in Q1 2011.

In the North, where there has been strong demand and equally high resale prices, it is inevitable that the COVs of the districts located in this region are higher as well. As seen in Graphs 2 and 3, the median COV for prime districts like Bishan, Toa Payoh and Ang Mo Kio continue to hover above the S$60,000 mark for five-room flats and have almost doubled from two years before for four-room flats.

The logic holds true even for areas that experienced a larger decrease in COVs. Districts in the East such as Pasir Ris, as well as those in the West like Jurong East, recorded significant increases in COVs when measured over the two-year period. For the former, COVs for four-room flats saw a 52 per cent increase in median price levels, while the latter which fetched an estimated 75 per cent rise.

Judging from these results, public housing affordability will remain an issue, at least until the COVs are brought down sufficiently to match levels seen in earlier years.

Also, given that demand far outstripping supply was a major factor in pushing COVs to sky-high levels in the first place, it remains to be seen whether this can be mitigated as the impact of the new government rulings and the introduction of new housing projects feed through the market.

By Adam Rahman – Senior Marketing Executive at PropertyGuru

Source : Today – 27 Sep 2013

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