The increase in HDB resale prices has cast a new spotlight on cash over valuation (COV).
In July, a five-room HDB DBSS (Design, Build and Sell Scheme) flat in Bishan was sold for $1.295 million, setting a new record for public housing.
The sale came just a month after the previous high was recorded, when an HDB terraced house in Whampoa changed hands for $1.268 million. The sale marks the latest in a string of million-dollar HDB resale transactions that have occurred this year. Based on HDB data disclosed on data.gov.sg as of Aug 24, a record 145 HDB flats have sold for at least $1 million in 2021, trouncing the 82 recorded for the whole of 2020.
The spike in million-dollar transactions for public housing reflects the overall uptrend in resale prices which has remained persistent, even amid tightened Covid-related restrictions.
According to HDB data released last month, while HDB resale volume in 2Q2021 declined 6.8% q-o-q due to restrictions, prices rose 3% q-o-q and 11% y-o-y, bringing the HDB resale price index to just 2% below the recent peak in 2Q2013. This marks the fifth consecutive quarter resale prices have risen.
The increase in resale prices has cast a new spotlight on cash over valuation (COV). COV represents the differential amount between the flat’s valuation, which is determined by HDB, and the agreed resale transaction price. Buyers have to pay COV in cash upfront and cannot use their CPF or housing loans to cover the payment.
For the record-breaking Bishan sale, COV was anticipated to be to the tune of $100,000 to $150,000, though ERA Realty property agent Elson Wang, who brokered the deal, was quoted saying the final figure was “less than expected”.
Nonetheless, incidents where resale flat buyers pay such a high COV are not unheard of nowadays. “The quantum [of COV] varies and can exceed $100,000 in rare cases,” says Lee Sze Teck, senior director (research) at Huttons Asia.
A five-room HDB flat at Natura Loft, a DBSS project in Bishan, was sold for $1.295 million in July (credit: Samuel Isaac Chua/The Edge Singapore)
More buyers willing to pay COV
Exact details on how COV has trended amid the robust resale market remains murky, as HDB stopped publicly disclosing COV data after 2013. This coincided with a change in the resale process which now dictates valuation of an HDB flat is revealed only after parties to the transaction agree to a price, rather than before.
However, a written reply by the Ministry of National Development (MND) on July 26 to a query raised in Parliament revealed that in 1H2021, a third of resale flat buyers paid COV, higher than the one in five that paid COV in 2020.
Another written reply by MND dated July 6 revealed that based on resale flat transactions registered from January 2020 to April 2021, less than one in four involved a COV. Of these, about six in 10 paid a COV of not more $20,000 while four in 10 paid a COV of more than $20,000.
The growing number of resale transactions involving COV points to an increased willingness by buyers to pay the cash outlay.
One reason for this is the surge in demand, as more home buyers look to resale properties in the face of delays in the completion of Build-To-Order (BTO) projects following the pandemic. In its HDB Market Pulse report for 2Q2021, OrangeTee Research & Analytics highlighted that construction delays have driven many couples to seek housing in the secondary market, while buyers downsizing from private properties have also turned to the HDB resale market.
The increased competition for resale flats has allowed sellers to command higher prices. Buyers, on the other hand, are willing to pay the COV in exchange for the certainty of securing a flat and within shorter timeframes.
The propensity for buyers to shell out a premium for resale flats increases in more mature estates or those located near amenities. Christine Sun, senior vice president of research & analytics at OrangeTee & Tie, also notes that flats that have more appealing attributes such as good views, a high-floor location or good design features, are better able to command a higher COV.
Despite an increased likelihood of having to pay COV, demand for resale flats remains strong. In the first half of the year, HDB resale prices grew 6% on the back of 14,644 transactions, the highest 1H sales volume since 2010 when 17,598 resale flats were sold.
HDB flats that have attributes such as good views, a high-floor location or good design features are better able to command a higher COV (credit: ERA)
Outlook for prices and COV
Given the strong performance of the resale market to-date, the momentum is expected to carry forward throughout the rest of the year. “The supply-demand imbalance may persist this year and the situation may drive prices of flats higher in the coming months,” notes Sun.
More delays in BTO projects may further exacerbate the situation. On Aug 26, HDB disclosed that five BTO projects located across Bukit Batok, Bukit Panjang and Woodlands will face further delays in completion after its main contractors pulled out due to financial difficulties. The affected projects, which comprise a total of 2,982 units across 13 blocks, had been slated for completion between 4Q2021 and 2Q2023.
Given that several BTO projects face a delay of a year or more, buyers who cannot stomach the wait may choose to give up their BTO unit to pursue a resale flat in light of potentially loosening restrictions. In July, MND indicated that BTO buyers may be able to cancel their flat booking without incurring penalties by submitting an appeal to HDB.
In line with current regulations, buyers who cancel their flat booking will usually forfeit their option fee or 5% of the flat purchase price paid in advance, while also having to wait for one year before being able to apply for subsidised housing again. Buyers who are successful in their appeal will have the penalty and one-year waiting period waived.
So where will COV go from here? For Sun, a further uptrend is possible, as more young couples could continue to turn to the HDB resale market in view of construction delays. “If COV continues to trend upwards, some young people may find it harder to buy flats in selected mature estates or to live nearer to the downtown core,” she remarks.
For Hutton Asia’s Lee, COV is likely to stabilise for the rest of this year. “We think that demand is stabilising, and construction activity in the BTO segment is picking up [along with] resistance from buyers towards paying COV,” he says.
One thing market observers agree on is that the HDB resale market will remain robust in the near term. Sun anticipates HDB resale volumes may hit between 27,000 and 29,000 units a year, marking a new all-time high. In comparison, 24,748 units were sold in 2020, while 23,714 units were transacted pre-pandemic in 2019. “Prices of resale flats may rise by 9%-11% for the whole of 2021,” she predicts.
Mark Yip, CEO of Huttons Asia, echoes the sentiment, anticipating that HDB resale prices may rise some 8% for the year, the strongest growth since 2011.
As for million-dollar HDB resale transactions, those are not expected to disappear anytime soon. According to Yip, such transactions could hit the 200 mark by the end of the year, as positive sentiments give owners the leverage to ask for higher prices.