Understanding how COV affects your flat’s appreciation

Almost 90 per cent of Singaporeans are home owners, and most of them own HDB flats. For many Singaporeans, the flat isn’t just a roof over their heads; it also acts as a retirement fund, a stepping stone toward more luxurious properties, or a way to give their children a head start. In this article, we examine the key factor that drives HDB resale profits: the COV

A brief explanation of resale flats and the COV

In order to understand how your flat can make you a profit, you must understand the concept of Cash Over Valuation (COV).

The asking price for a flat may not match the actual valuation of a flat. For example, say I have a flat and I want $500,000 for it.

A property analyst takes a look at it, suggests I buy his book “Grips, and how to get one”, and says the flat is worth $490,000 tops.

Being Singaporean, I will change my mind about my flat’s value when the sun burns out. I’ll still want buyers to pay me $500,000, and the difference of $10,000 is the COV.

If you take a loan to buy my flat, the COV will not be factored into the loan. The bank, or HDB, will base the loan amount on the actual valuation; not my asking price. As such, you’ll have to pay me the COV with your own cash.

The COV went out of control in 2011

Over the past two decades, high COV prices became an unintentional norm. The government refused to intervene at first, on the basis that the COV would be moderated by free market forces (i.e. if it gets too expensive, people will naturally stop buying and it will fall again.)

By 2011, COV prices were about as controlled as a roomful of teenagers with an unlocked liquor cabinet. COV prices of up to $36,000 were typical, and in one instance the COV for a unit in Bishan was around $250,000. This made it one of the first flats to ever breach the million dollar mark.

This sent Singaporeans into a confused panic: on the one hand, some Singaporeans worried that future generations would be burdened by unaffordable housing. On the other, some Singaporeans insisted that the COV system should continue, because who doesn’t want to get rich off their flat?

In order to avoid Singapore’s first civil war, steps have now been taken to amend the COV situation.

The new system for dealing with COV

As of March 2014, HDB has stopped publishing COV prices. They’ve also removed records of past COV figures from their website. This won’t do much to lower COV prices of course – it just means property agencies will be the ones keeping score now.

The biggest change is that valuations no longer occur before prices are negotiated. HDB will send the official valuation only after the buyer has been given the Option to Purchase (OTP.)

(For more information on the OTP, and the other steps involved in buying a flat, like us on Facebook. We’ll be covering this in another article.)

The new system means that the prices of flats are negotiated before the COV is disclosed. Previously, the valuation of the flat was conducted first, and then there would be haggling over the COV.

To go back to my earlier example:

Say I offer my flat for $500,000. You agree to this price, without knowing what the COV is. After you sign the OTP, HDB conducts a valuation and tells you the flat is only actually worth $490,000.

Now you have to come up with the difference, because the loan will treat my property as if it’s worth only $490,000.

In rare cases, Cash Under Valuation (CUV) might also happen. For example, I could have offered to sell my flat for $480,000, and then only found out the actual valuation is $490,000. Don’t count on this happening though, because property agents will still track the historical prices of surrounding properties. It’s unlikely that anyone but the most desperate would peg their home price under the area’s average.

What drives COV prices up or down?

There are three main factors that will influence the COV. These are:

• Amenities and facilities
• Condition of the flat
• Size of the flat

1. Amenities and facilities

Over the years, certain amenities such as coffee shops, train stations, and malls may have sprung up around the flat. The location and “brand name” of nearby schools is also a crucial factor.

Buyers who desire certain amenities (e.g. wanting to live near a good school to improve their children’s odds of getting in) may be willing to pay above average prices to live in the area.

In general, resale flats have higher values than newer ones. This is because most new flats are constructed in non-mature districts such as Punggol – these are areas where amenities are not yet built up.

In terms of facilities, older flats have some features that new ones don’t. For example, many older flats have a garbage chute located in the unit itself. For newer flats, you may have to bring the garbage to a common area. This seemingly trivial feature is actually a big deal. Buyers with mobility issues (e.g. the elderly or handicapped) greatly prefer having the disposal chute in the unit itself.

2. Condition of the flat

Old flats are often more valuable, but that assumes their age doesn’t show too much. If the flat looks like the aftermath of an airstrike, buyers are going to offer less. After all, they’ll have to pay for restoration work after buying.

Renovations, maintenance of paint and wallpapering, non-warped flooring, etc. all factor into the price.

3. Size of the flat

Older flats tend to be larger than newer ones. Here’s a little tip: if you see there’s no multi-storey carpark, the flats will tend to be more spacious (less room is taken up by said carpark.)

Some older types of HDB flats, such as maisonettes, may feature things like balconies or more than one floor. It may no longer be possible to get flats of that size, and this will raise the COV.

The best way to guess at your flat’s value is to look at surrounding property transactions. Visit sites that list property in the area, and see how much they’re going for. This will give you a benchmark to measure your flat’s probable worth. If you want to scout around, you can check out some of Singapore’s best listings on 99.co.