CASH OVER VALUATION (COV) : IMPLICATIONS ON THE SINGAPORE PUBLIC HOUSING RESALE MARKET

Abstract

Cash over valuation (COV) is a unique phenomenon in Singapore. It has a great impact on a buyer's affordability as it needs to be paid by cash instead of CPF savings or housing loans. It has reached record highs in recent years and is a bone of contention in the recent 2011 General Election.

COV arises due to an imbalance between high demand for HDB flats and a supply crunch in the market. The reason for the gap (COV) to persist between a valuer's appraised value and market expected selling price is due to the inherent limitation of valuation to take into consideration of highly subjective factors. In addition, due to the poor public understanding of open market value, buyers accepted COV as a norm for HDB resale transaction.

The buyers had common perceptions that COV affected their housing affordability and was caused by the increasing number of Permanent Residents (PRs) in the resale market. Buyers also tended to use COV as an indicator for assessing the quality of the property. They recognized that COV was the only way which allowed the seller to obtain cash from the sale proceeds in view of the CPF rule. Hence, they felt that asking for COV is the sellers’ rights. Nonetheless, they felt that COV is an outcome of various government policies. Therefore, it is the government’s duty to step in and regulate COV in the resale market. In addition, buyers also had misconception that COV is compulsory and is part of the government scheme.

The top three sources of information relied by buyers to determine their COV budgets were Internet, friends and relatives, and property websites. The persistency of COV phenomenon had led to the undermining of the valuers’ image in the buyers’ eyes. Professionals such as valuers were ranked last in affecting their COV budget.

It is understandable that the market should be allowed to move freely to ensure market efficiency. However, without appropriate government intervention, COV might spiral beyond control and lead to long term capital appreciation which is detrimental to housing affordability. Hence, it is proposed that COV be allowed to float like the Singapore currency but within a band that is determined by HDB. This also acts as a market amendment in view of the subjective errors by the appraisers. Since the asking of COV is due to profits, the government can impose a high ad valorem tax on the COV earned by the sellers, making it less lucrative. To increase the public knowledge on the concepts of open market value and COV, HDB can work closely with the SISV to improve public awareness and clear the doubts and misconceptions of valuation.