{"id":4039,"date":"2016-01-05T03:57:35","date_gmt":"2016-01-04T19:57:35","guid":{"rendered":"https:\/\/www.99.co\/blog\/singapore\/?p=4039"},"modified":"2022-07-01T03:41:31","modified_gmt":"2022-06-30T19:41:31","slug":"how-cov-affects-your-flats-appreciation","status":"publish","type":"post","link":"https:\/\/www.99.co\/singapore\/insider\/how-cov-affects-your-flats-appreciation\/","title":{"rendered":"Understanding how COV affects your flat\u2019s appreciation"},"content":{"rendered":"
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Almost 90 per cent of Singaporeans are home owners, and most of them own HDB flats. For many Singaporeans, the flat <\/span>isn\u2019t<\/span> just a roof over their heads; it also acts as a retirement fund, a stepping stone toward more luxurious properties<\/span>, or a way to give their children a head start<\/span>. In this article, we examine the <\/span>key factor that drives HDB resale profits: the COV<\/span><\/p>\n

A brief explanation of resale flats<\/span> and the COV<\/span><\/strong><\/h3>\n

In order to understand how your flat can make you a profit, you must understand the concept of Cash <\/span>Over<\/span> Valuation (COV). <\/span><\/p>\n

The asking price for a flat may not match the actual valuation of a flat. For example, say <\/span>I<\/span> have a flat <\/span>and I <\/span>want $<\/span>50<\/span>0,000 for it. <\/span><\/p>\n

A property analyst takes a look at it, suggests I buy his book \u201c<\/span>Grips, and how to get one<\/span><\/em>\u201d, and says the flat is worth $4<\/span>90<\/span>,000 tops.<\/span><\/p>\n

Being Singaporean, I will change my mind about my flat\u2019s value <\/span>when<\/span> the sun burns out. I\u2019ll still want buyers to pay me $<\/span>50<\/span>0,000, and the<\/span> difference of $<\/span>1<\/span>0,000 is the COV.<\/span><\/p>\n

If<\/span> you take a loan to buy my flat<\/span>, the <\/span>COV will <\/span>not <\/span>be factored into the loan. The bank, or HDB, will base the loan amount on the <\/span>actual valuation;<\/span> not my asking price. As such, <\/span>you\u2019ll have to pay me the COV with your own cash<\/span>.<\/span><\/p>\n

The COV went out of control in 2011<\/span><\/strong><\/h3>\n

Over the past two decades, high COV prices became an unintentional norm. The government <\/span>refused to<\/span> intervene<\/span> at first<\/span>, 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.)<\/span><\/p>\n

By 2011, COV prices were about as <\/span>controlled<\/span> as a roomful of teenagers with an unlocked liquor cabinet. <\/span>COV prices of up to $36,000 were typical, and in one <\/span>instance the COV for a unit in <\/span>Bishan<\/span> was around $250,000. This made it one of the\u00a0<\/span>first flats to ever\u00a0<\/span>breach the million dollar mark<\/span><\/a>.<\/span><\/p>\n<\/div>\n<\/div>\n

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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\u2019t want to get rich off their flat?<\/span><\/p>\n

In order to avoid Singapore\u2019s first civil war, steps have now been taken to amend the COV situation. <\/span><\/p>\n

The new system for dealing with COV<\/span><\/strong><\/h3>\n

As of March 2014, HDB has stopped publishing COV prices. They\u2019ve also removed records of past COV figures from their website. This won\u2019t do much to lower COV prices of course \u2013 it just means property agencies will be the ones keeping score now.<\/span><\/p>\n

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.)<\/span><\/p>\n

(For more information on the OTP, and the other steps involved in buying a flat, <\/span>like us on Facebook<\/span><\/a>. We\u2019ll be covering this in another article.)<\/span><\/p>\n

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

To go back to my earlier example:<\/span><\/p>\n

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.<\/span><\/p>\n

Now you have to come up with the difference, because the loan will treat my property as if it\u2019s worth only $490,000. <\/span><\/p>\n

In rare cases, Cash Under Valuation (CUV) might also happen. For example, I could\u00a0<\/span>have offered to sell my flat for $480,000, and then only found out the actual valuation is $490,000. Don\u2019t count on this happening though, because property agents will still track the historical prices of surrounding properties. It\u2019s unlikely that anyone but the most desperate would peg their home price under the area\u2019s average.<\/p>\n<\/div>\n<\/div>\n

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What drives COV prices up or down?<\/span><\/strong><\/h3>\n

There are three main factors that will influence the COV. These are:<\/span><\/p>\n