The Case of the Falling COV: A Step towards Affordability?

Recent findings released by the Singapore Real Estate Exchange (SRX) drew much attention to Cash-Over-Valuation (COV) premiums for Housing and Development Board (HDB) resale flats, with reports stating that overall COVs across all HDB property types have been experiencing a declining trend. In fact, this downward spiral has been said to be so persistent that by the start of September 2013, COVs are said to have fallen to a 4 year low.

In a country where property continues to stir public debate, it is hardly surprising that word about falling COV prices would spread into daily conversations. After all, COVs are by nature often deemed to be an unfair negotiation tactic employed by property sellers for a quick profit, causing much furore amongst those wishing to purchase their first home or to upgrade.

Sentiments towards COVs worsened when news broke of a number of resale flats with COVs exceeding $100,000 were transacted, resulting in many clamouring for the government to take action, with the more vocal ones demanding for the system to be scrapped altogether. Such reactions against the payment of what most define to be “ridiculously high” costs on top of a HDB unit’s market valuation put into the spotlight recurring concerns of public housing affordability, acutely felt by young couples and families trying to find a suitable place to call home.

Such is the case in Toa Payoh. Long considered to be one of the early bastions of affordable public housing in Singapore since the1960s, today it has earned the reputation of being one of the most expensive districts to buy into with a number of flats commanding COV values over $100,000. For the buyer, this translates to him having to fork out almost or more than 2 ½ times more cash upfront to purchase a same-sized flat which he can find cheaper elsewhere. An even more startling fact is that in comparison to other fluctuating indices such as the Certificate of Entitlements (COEs) for cars, COVs for these choice units in Toa Payoh consistently rank ahead (given that COEs for all car categories are between $66,000 and $83,000 in Q2 2013).

Falling COVs therefore signify a beacon of hope. With analysts predicting COV prices to further decrease and more resale properties changing hands with low or no COVs, citizens are keeping their fingers crossed on whether this trend will finally bring down the cost of resale housing to reasonable levels. This is especially so in light of the a slew of cooling measures the government has introduced since the start of 2013 in an attempt to tame the property market, with the latest placing stricter control on home ownership for Permanent Residents (PRs).

Will balance be indeed restored to the HDB resale market? Or are we placing blind faith in the downward trajectory of COVs in the hopes that a positive change in the property market will occur?

Based on historical data, it can be seen that while median COVs for resale units have seen a significant drop across the island, its decline varies by region. As seen from the graph, estates closer to the city, denoted as belonging to the “Central” category, such as Bukit Merah and Kallang/Whampoa as well as those in the North such as Bishan, Toa Payoh and Ang Mo Kio, typically tend to attract a higher COV by virtue of their popularity and experience a slower rate of decline over time. More specifically, while the Central and the North saw a drop of only 0.25% and 2.94% in median COV prices for 4 and 5 room HDB units respectively between the first two quarters of 2013, the East, West and North-Eastern regions in particular faced a steeper dip of between 18.5 – 19.8% within the same period.

Is it affordable to start buying again?

Surely wouldn’t a fall in COVs, regardless of how small it is, still bring positive news for prospective property hunters? On the surface, outlook seems to be optimistic however, upon closer inspection, we can see that despite the fall in COVs, there is still a marked difference in COV price levels as compared to two years ago in 2011. Most notable are the patterns seen in both the Northern and Central regions where the fall in COVs has not caught up with the earlier rise beginning from Q1 2011.

Currently the median COVs for the North and Central regions stand at over $39,000 and $53,600 respectively for 4 and 5-room flats, which are still 51% and 49% more than the base values of COVs in Q1 2011, an indication that the HDB resale properties are relatively more expensive now.

Particularly in the North, there has been a lot of attention garnered as a result of strong demand and equally high HDB resale prices, it is inevitable for COVs of the districts which are located in this region to be slightly costly as well. As seen in the graph, the median COV for prime districts like Bishan, Toa Payoh and Ang Mo Kio continue to hover above the $60,000 mark for 5-room flats and have almost doubled from two years before for 4-room flats.

The logic holds true even for areas which experienced a larger decrease in COVs. Districts in the East such as Pasir Ris, as well as those in the West like Jurong East recorded significant increases in COVs when measured over the two year period. For the former, COVs for 4 room flats saw a 52% increase in median price levels, while the latter which fetched an estimated 75% rise.

Judging from these results, it can be said that the public housing affordability issue continues to exist, at least until COVs are brought down sufficiently to match prices seen in earlier years. Also, given that demand for HDBs outstripping supply between 2011 and 2012 played a major factor in influencing COVs to rise to sky high levels in the first place, it remains to be seen whether this can be mitigated once the new government rulings and the introduction of new batches of housing projects come into effect.

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The Case of the Falling COV: A Step towards Affordability?

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