DOES HIGHER CASH OVER VALUATION PAID BY RESALE FLAT BUYERS TRANSLATE INTO HIGHER RETURNS?

Abstract

In the past few years, the Housing and Development Board’s resale flats have experienced record high cash over valuations being transacted. This phenomenon has taken centre stage due to its far-reaching economic and political implications. As competition for properties intensifies, the premiums of resale flats have been pushed upwards. This has led to unhappiness among citizens and concerns about the affordability of resale properties. Hence, it is important for policymakers and academicians to understand buyers’ motivations behind paying cash over valuation so as to prevent the persistence. The primary aim of this study is to investigate if the higher premiums paid are justified by the higher returns flat owners can reap from the sale. The methodology, to test the research hypotheses, involved four regression models. The dataset spanned from 1997 to 2012, obtained from the Housing and Development Board and Singapore Institute of Surveyors and Valuers. The findings showed that past cash over valuation has a significant impact on the present amount. Thus, buyers’ willingness to pay the premiums seems to be influenced by arbitrary reference values (anchors). The study finds that the resale market is efficient, as the higher returns gained are justified by the higher initial cash over valuation paid. Hence, it is likely that the cash over valuation amount is driven by buyers’ expectations of future price appreciation. In addition, a positive correlation between the quality of the property characteristics and premiums paid were observed. The persistence of the price-valuation discrepancy in the market warrants the need to review valuation techniques and public housing policies. This is to ensure that affordability remains the cornerstone for public housing.