CASH OVER VALUATION (COV): HAS THE POLICY TO REDUCE FOCUS ON COVS IN THE NEGOTIATION PROCESS WORKED?

Abstract

In the period 2Q2012 to 2Q2014, prices of HDB resale flats appreciated by 140.5%. In this period, premiums paid above valuation, known as cash over valuation (COV), increased cash outlay required to purchase a HDB resale flat significantly and eventually led to the revision of the policy. The revised policy, which is the focus of this study, requires buyers and sellers to look at comparables instead of relying on a HDB valuation report to arrive at an agreed price, in a bid to prevent over reliance on COV data in negotiation. Findings of this study reflect that differences between transacted prices and valuation regardless of type of unit or location now appeared like a random walk. The public could no longer anchor based on amenities in the region or published median COV values. The revised policy was therefore effective in reflecting the market sentiments more accurately across board.

However, more education and transparency is required to equip the public with the right skills to conduct a valuation of their property, as buyers and sellers still have the misconception that a location providing convenience to transportation and retail amenities gives them a stronger bargaining power in setting their asking price. There is a strong tendency for buyers to attach transaction utility to transportation and retail amenities. The public’s lack of knowledge on appropriate valuation methods and interior conditions of comparable resale units listed also led to consultation and more assurance required from the salesperson to proceed with the transaction. Finally, with demand side and supply side cooling measures persisting that led to poor market sentiments, both buyers and sellers were inclined to adopt the wait and see approach.

For policymakers, such findings above suggest that releasing a valuation report after an agreement price has been made between buyer and seller is effective in removing the anchoring effect for price premium perceived for locality and size. Cooling measures can better achieve their intended effects when the only reference point buyers and sellers have are the information on the comparable units transacted. However, policymakers also have to ensure that the public is equipped with the necessary skills and information to identify a price estimate that is close to the HDB valuation price released after the agreed price between buyer and seller, to facilitate a smooth transaction procedure and a more equitable outcome.