Regulate valuations of new homes

A GAPING loophole in the pricing of private properties exists, resulting in the authorities and the housing developers playing a game of "cat-and-mouse" ("Indirect discounts for home buyers under review"; last Wednesday).

As long as this loophole is not plugged, every cooling measure will be circumvented by yet higher and higher property prices when the housing developers respond with their countermeasures.

In computing housing loans for resale properties, banks appoint their own valuers to determine the market price, and it is not difficult to establish a fair market price as long as there are comparable units in the neighbourhood, which is usually the case.

However, for new developments, housing developers would insist that their development is unique and not comparable and so their selling price shall constitute the market price.

Consequently, when a new government policy requires a higher down payment, the property prices are raised upwards with an accompanying rebate in some form so that the cash payment remains unaffected.

This strategy applies to an increase in the additional buyer's stamp duty and all other such measures.

The resultant effect is that the prices of each new development are higher than the previous one, and owners of older properties also demand higher prices, resulting in higher and higher cash over valuations (COVs). The spillover effect extends to public housing as well.

Perhaps a more effective solution is for the authority to assist in the valuation of new developments by requiring an independent valuation.

Of course, a formula has to be developed for such new developments as the comparison method is no longer possible.

The cost-plus method can be used instead. This is done by taking into consideration the cost of the land (the psf ppr rate of the land), the construction cost, plus the financing and other costs, and a 10 per cent profit margin, to arrive at the market price of each development.

As the Urban Redevelopment Authority regularly publishes a construction cost index, the rest are merely a percentage of the first two cost items.

For example, if the land cost is $400 psf ppr, while the construction cost is $300 psf, with the financing and other costs at 15 per cent, the market price of a 1,400 sq ft unit should work out to $1,155 psf or $1.617 million, on average, factoring in the 10 per cent profit.

A 5 per cent to 10 per cent premium could be added to this average unit price for units on higher floors and other premium units, while less desirable units could get a discount.

The market prices so determined would now be used by the banks to determine the mortgage loan to be supported instead of the developer's sale price.

Of course, if a housing developer wants to charge a higher price and the buyer is willing to pay the difference in the form of a COV, the sale can still take place.

Francis Zhan