Out with COVs, there’s a better way

The debate over cash-over-valuations, or COVs, for Housing and Development Board (HDB) flats continues. This week, the body representing Singapore’s property valuers called for the removal of all official data on cash premiums paid for HDB resale flats.

The Singapore Institute of Surveyors and Valuers (SISV) said it supported National Development Minister Khaw Boon Wan’s decision to cease the release of COVs and urged flat buyers instead to “use market valuations as the basis for making home-buying decisions”.

The COV is the amount a buyer pays over and above the valuation of an HDB resale flat. As it must be paid in cash, it has a significant impact on affordability. In its latest official quarterly statistics in July, the HDB stopped publishing figures on the overall COV paid for resale flats but continued to provide median COV data by HDB towns and flat types, as it found that a simple average number can be very misleading.

Mr Lim Lan Yuan, SISV president of valuation and general practice, noted that when the Government first published COV data in 2007, its aim was to reassure buyers that the high COVs reported in the news were not the norm. But today, such figures are being used by sellers as a basis for asking for cash as a right in resale transactions, he said.

He added that professional valuers would have taken market conditions into consideration when determining the value of a flat – the COV should thus not be included in the price of a home.

I am not sure who invented the term COV. It probably came up during market negotiations between buyers and sellers and their agents; and for want of a better term, it soon became part of the established market lingo.

You may abolish the use of the term but I am not sure if you can make the ban stick. Because it is such an important component of the deal, it will surely re-emerge in the guise of a new word or term, or as Mr Khaw puts it, lead to illegal, undeclared cash payments.

At this point, you may be wondering why there is no such equivalent term for deals transacted in the private housing market. Is it any less important in a private housing deal? Actually, the COV equivalent for the private housing market occurs far less frequently simply because the actual valuation of the property is mostly done after the sale price has been agreed upon.

The buyer then sources for a loan with various lenders who will usually require that a valuation be done to protect its own interests and for determining the amount of the loan it is prepared to disburse.

Under current HDB resale market rules, however, the seller needs a valuation to be done first on his property before he can sell his flat. In most cases, the seller submits an application for a valuation even before he starts his marketing.

If a similar practice for the private sector is adopted for the HDB resale market, there is a good chance that both buyer and seller will be forced to focus on the price in their negotiations, as it should be.

However, as a safeguard to protect buyers from committing to a purchase which they cannot afford in terms of cash availability, the HDB may stipulate that buyers are allowed the option to pull out of the deal if the market valuation is more than, say, 10 per cent lower than the agreed price.

The adoption of private sector practice may cause some inconvenience and some administrative hassle for both the HDB and private valuers, but it may be the only way to focus the attention of buyers and sellers on the selling price.

Because buyers may be negotiating “blind” in the sense that they do not how much cash they will eventually have to fork out, it will instil a little bit more discipline in their negotiations. However, we have to recognise that in coming up with a solution to the COV issue, we are only treating the symptoms and not the root of the problem. The problem with COVs may go away by itself if there is less imbalance between demand and supply.

By Colin Tan – head of research and consultancy at Chesterton Suntec International.