Up, up & away

The sky seems to be the limit when it comes to coughing up cash for a resale HDB flat.

A 1,860sqf, 24th-floor HDB maisonette at Bishan Street 24 was put up for sale in March.

The asking price? A jaw-dropping $950,000, which meant a whopping $220,000 cash premium on top of its valuation of about $730,000.

The potential buyer hit a snag with his bank loan application, but the transaction eventually went through in April at a record price of $900,000, with the seller pocketing $170,000 in cash.

To meet such a high asking price, a potential buyer needs huge liquid reserves as he would not be able to borrow the cash component from banks.

Also, not many would qualify for a loan given the high mortgage repayments.

“The maximum loan quantum is 80 per cent of the purchase price or valuation, whichever is lower,” says Phang Lah Hwa, OCBC Bank’s head of consumer secured lending.

The bank would determine the exact loan amount based on factors like the buyer’s “financial commitments, income, credit history and repayment ability”.

Upfront cash needed

Think long and hard if the asking price will stretch your finances.

Remember that the cash-over-valuation (COV) premium above the flat’s HDB valuation has to be fully paid for in cash – it cannot be deducted from your CPF account, or paid using a bank or HDB loan.

“If you have difficulty coming up with the cash, it is an indication that you cannot afford it,” warns Colin Tan, director of research and consultancy at Chesterton Suntec International.

“Ideally, the transacted price should be at valuation. But when demand outstrips supply, prices tend to go up rapidly. If valuation does not catch up, prices go up via COV increases,” explains Albert Lu, chief executive officer of C&H Realty.

“Buy property by looking at its overall price, not just the COV,” advises Colin.

“COV exists only because the valuation has not caught up with the market price – in other words, prices are moving too quickly for valuations to catch up. When the price increases slow, the COV will fall. Hence, the COV indicates how fast prices are rising.”

“Everything looks good now when interest rates are low. You may be happy to have bought something before prices climb further in the next one or two years. But when things return to normal, you may have nightmares for the rest of the loan period,” Colin says.

“So if it is a 25-year loan, you may be happy for two years but sad for the next 23 years. Property prices move in cycles, and we are at a high for public flats. It will correct – the question is when and by how much?”

Think long-term

Before you sign on the dotted line, do your sums and consider the scenario in the long run.

Lah Hwa advises: “Assess your financial ability before committing yourself to the purchase. Interest rates are low now, but consider the home’s affordability in the long run, in the event that interest rates rise and loan instalments increase. Consult mortgage specialists to better understand a home loan commitment and the payment options available.”

So where does this leave buyers with not-so-deep pockets?

Will huge COVs become the order of the day?

Says Eric Cheng, chief executive officer of ECG Property: “Transactions of $900,000 are rare and should not be used as a benchmark. That Bishan flat is a rare penthouse unit, with unblocked views and within walking distance of an MRT station. I would advise home buyers to be prudent as more units will be available despite strong market sentiment. Be careful as anything that goes up will come down.”

There are other options for cash-strapped young couples and those unwilling to splash out on the COV.

Says Albert: “The best solution is to book a new flat from HDB through the Built-To-Order (BTO) scheme. A new HDB flat does not require COV. As a typical flat under the BTO scheme takes about three years to complete, the couple may wish to temporarily stay with their parents or rent a small flat.”

Hot Areas Still Sizzle

Expect to pay more if you are eyeing a home in a hot area.

But in general, resale prices are moderating.

“COV has more or less stabilised because it is reaching the limits of affordability,” concludes Albert Lu, chief executive officer of C&H Realty:

“It is now hovering between $20,000 and $30,000. But if the HDB flat is located in a popular estate like Queenstown, Bukit Merah or Marine Parade, is situated near an MRT station, and is on a high floor and nicely renovated, the COV can be $70,000 or more.”

If you are in a hurry to buy a home,” he adds, “an option is to consider less popular estates like Woodlands and Sembawang, flats further away from MRT stations, and units on lower floors.”

It pays to scan the horizon to snag a good buy, but you’ll have to be quick.

Says Eric Cheng, chief executive officer of ECG Property: “You can still find units with COV as low as $5,000 to $10,000 in good locations such as Marine Parade, but they normally get sold within a day.”

Source : Home & Decor – 9 Jul 2010

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