Removing COV is a bold, timely U-turn

This story was first published in The Straits Times on March 15, 2014

IT'S been a long time coming, but on Monday the Government finally bit the bullet and did what it should have done years ago - it found a way to get rid of cash over valuation (COV) from the public housing market sales process for good.

COV is the cash premium a buyer pays over and above the valuation of an HDB resale flat. As it must be paid in cash, it has a significant impact on affordability and is often used as a barometer of demand in the housing market.

As of 5pm on Monday, COVs were banished from the negotiation process, and buyers and sellers must now agree on a price before seeking an official valuation.

That is in line with the private market, where negotiations are "rightly" based on recent transaction prices, noted National Development Minister Khaw Boon Wan.

With the new rule, a price must first be agreed upon and the Option To Purchase (OTP) granted, before a buyer can get a valuation from the HDB. This will, Mr Khaw added, "restore the original intention of valuation, which is to help buyers get a housing loan".

Since news of the policy change broke, many buyers and industry players have welcomed the move, while some others have accused the Government of "bureaucratic intervention".

In reality, the removal of COV will only serve to stabilise the public housing market in the long run and we should be encouraged that the Government has been bold enough to make a U-turn on this policy, given that only a couple of years ago, Mr Khaw categorically said he "cannot abolish cash premiums" despite calls to do so.

The COV has been a problematic issue, especially in a rising market, because sellers almost always ask buyers for a cash premium above the valuation of their flat - even though the attributes of their flats have already been taken into consideration in the valuation. Negotiation was done mostly on COVs rather than the total price of a flat.

This caused an upwards price spiral in the market which analysts had compared to a "case of the cat chasing its tail". This caused widespread unhappiness among home buyers, especially when COVs hit record highs, with the median COV peaking at $38,000 in mid-2011. Some units in popular estates even fetched $100,000 premiums.

Then, at the height of the property boom, Mr Khaw in defending why he could not abolish COV, explained: "It is simple... COV is the difference between (a) price of flat as agreed between buyer and seller and (b) the valuation of the flat given by a professional valuer. (b) is done by an objective professional. (a) is between buyer and seller."

The question was who would set the price if the COV were abolished? It certainly could not be determined just by professional valuers, Mr Khaw noted.

A decade ago, the Government tried removing COV but this went "underground" in cash-back schemes exposed in 2001, where buyers and sellers colluded to over-declare the agreed selling price. It allowed the buyer to get a higher loan either from a bank or the Housing Board, with the "extra" cash illegally divided out among those involved.

In recent years, buyers and sellers came up with other ways of falsely declaring a low sale price - with the buyer giving the seller some cash in return. Such offences are punishable by a jail term and/or a fine.

So the COV returned and has remained a permanent fixture of the public housing resale market - until now. But the solution was obvious even back then - industry observers had suggested: why can't the public housing market follow the practice of the private market, where buyers and sellers negotiate a purchase price based on recent transactions?

Buyers can at the same time, as in a private property transaction, seek indicative valuations for the flat from private banks and valuers to ensure the purchase price is not too far off, and after the purchase, look for a bank that could offer a loan matching the valuation of the property.

By requiring buyers to get fair valuations from HDB after a price is agreed also overcomes the issue of buyers and sellers over-declaring a sale price. It would not be in the buyer's interest to do so because he would have to fork out the difference in price should the sale price differ significantly from the valuation.

With the latest move, even though the COV technically still exists if an agreed sale price is above the flat's valuation, it effectively removes the COV element in the sales process.

Introducing this policy at a time when COVs are at their lowest levels for years is also a well-timed move, since it reduces the sting for sellers, who might think they are losing a "bargaining chip" in the sales process.

That HDB will now publish daily figures on resale transactions rather than fortnightly will also significantly increase the transparency and availability of data in the public housing market, thus enabling buyers to negotiate accurately a price based on recent transactions. This will further help to reduce the speculative element in the market.

Taken together, they will have a significant impact in creating a far more stable public housing market and help reduce the volatility in prices that we've seen in the boom and bust cycles in the past decade or so. This can only be a good thing.

This story was first published in The Straits Times on March 15, 2014

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