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Explain COV

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Explain COV

Postby singapore eagle » Thu, 06 Mar 2014 12:20 pm

There's a story this morning that the median cash-over-valuation (COV) premium for HDB flats has fallen to zero. It was S$30k not so long ago, if I recall correctly.

This drop is said to indicate that the property market is cooling. But might it not just mean that the valuer - whoever he/she may be - has caught up with market sentiment and is doing a better job of valuing properties in line with buyers' willingness to pay?

And when the median COV was $30k, does that not imply that the valuer was doing a terrible job? It seems, after all, that no buyer was agreeing with official valuations at that time.

What is the V in COV?

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Postby Wd40 » Thu, 06 Mar 2014 12:31 pm

Good Point! If median COV is zero, I am pretty sure lots of properties especially condos are selling under the valuation. I noticed Melville park in particular lots of ads in propertee guru asking below valuation.

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Postby ScoobyDoes » Thu, 06 Mar 2014 2:20 pm

Wd40 wrote:Good Point! If median COV is zero, I am pretty sure lots of properties especially condos are selling under the valuation. I noticed Melville park in particular lots of ads in propertee guru asking below valuation.


but half of them will be for exactly the same unit, where multiple agents market the property and even at different prices.
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Postby Addadude » Thu, 06 Mar 2014 2:35 pm

The Valuation of a HDB flat is determined by the HDB itself. They are after all the ultimate owners of the flat - 'buyers' are merely paying a sum of money to 'possess' the flat for a fixed period of time ie the length of the lease.

So, if the HDB determines the valuation of the flat to be $215k for example, that valuation is the factor that will determine the maximum mortgage you can take out, and how much of your CPF you can use in the purchase etc.

The COV really comes into play when there are a number of purchasers keen to buy the flat. This could be for a variety of reasons over and above the the calculations the HDB used to determine the valuation. Things like proximity to parents, favourite schools, feng shui etc.

The government has always recommended that people DON'T pay COV but greed, panic buying and sheer kiasuism will have its way.

Effectively you have a bidding war and, if the flat is keenly contested for, the 'owner' can determine for themselves how much extra money they want over and above the official HDB valuation. This money has to be in cash. Hence the 'cash' in Cash Over Valuation.
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Postby singapore eagle » Thu, 06 Mar 2014 2:40 pm

So a drop in COV could be because there are fewer buyers, less greed, etc.?

Or it could be because HDB has adjusted its valuations upwards to reflect market sentiment?

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Postby Wd40 » Thu, 06 Mar 2014 2:50 pm

Valuations are not done by HDB. Its done by HDB's panel of valuers that are licensed by IRAS.

Savills is real estate agency is also in the panel of valuers:

http://www.savills.com.sg/services/valu ... ation.aspx

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Postby Addadude » Thu, 06 Mar 2014 3:53 pm

Wd40 wrote:Valuations are not done by HDB. Its done by HDB's panel of valuers that are licensed by IRAS.

Savills is real estate agency is also in the panel of valuers:

http://www.savills.com.sg/services/valu ... ation.aspx


Good point. But the principle remains. The valuation is the price formally recognised by the HDB as what the property is truly worth.

And yes, I believe that the lowering COV is a reflection of a more realistic approach by both buyers and sellers. Not a readjustment by valuers.
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Postby beppi » Thu, 06 Mar 2014 5:03 pm

The "valuation" reflects the fair market value of the flat - as determined by a panel of experts who are supposed to know it best.
COV is just the irrational bit of people paying "more than it's worth". I have asked several property agents why anybody in his/her right mind would do that and never got a convincing reply.

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Postby singapore eagle » Thu, 06 Mar 2014 5:08 pm

But surely the worth/value of a flat is what someone is willing to pay.

And if the median COV is S$30k, the valuation must be wrong?

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Postby beppi » Thu, 06 Mar 2014 5:14 pm

No, it's the other way round:
The buyers (laymen in property issues) think they know and understand the market better than the valuation panel experts and agree to pay more for the flats than the experts think it's worth.
This can be called Kiasuism, or irrational exuberance, or just stupidity.

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Postby Max Headroom » Thu, 06 Mar 2014 5:30 pm

...or a bribe.

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Postby Wd40 » Thu, 06 Mar 2014 5:57 pm

beppi wrote:The "valuation" reflects the fair market value of the flat - as determined by a panel of experts who are supposed to know it best.
COV is just the irrational bit of people paying "more than it's worth". I have asked several property agents why anybody in his/her right mind would do that and never got a convincing reply.


Correct! and one of main things taken into account while valuing a place is the actual transaction price history. Now when people pay a "COV" that increases the actual transaction price and what was "COV" in the previous months becomes part of the actual valuation in the future months, in a steady manner. This is what caused the rise in property prices.

Reason why people pay COV, is because of the demand and supply. More people wanting to buy a house than houses available in the market and agents creating a nice bidding kind of a platform to make sure prices keep going up and up.

Now with transactions happening under valuation, the future valuations of houses will take the new prices into account and valuation has to go down and thats how prices are expected to go down in the future. Whether it will really happen is anybody's guess.

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Postby Beeroclock » Thu, 06 Mar 2014 6:12 pm

The way i see it, in an ideal world (the kind that exists in economics theory books, where people are rational, information is widespread and transparent, the market is liquid, etc etc) COV should be zero. But in the real world you have a COV (or CUV) to reflect all those real world factors that escape the efficient market theories

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Postby bro75 » Fri, 07 Mar 2014 10:57 am

Why did we pay the COV? which I did when I bought my HDB. Because, paying the COV allowed me to buy the flat I want during that time. I could have insisted in paying less, but I will not be able to get the flat. During that time (2010), it was a good decision as both rentals and HDB prices shot up afterwards. As of this time, it is still a good decision versus renting. I believe COV more or less reflects the true market value rather than the official valuation which lags the market.

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Postby Wd40 » Fri, 07 Mar 2014 11:01 am

bro75 wrote:Why did we pay the COV? which I did when I bought my HDB. Because, paying the COV allowed me to buy the flat I want during that time. I could have insisted in paying less, but I will not be able to get the flat. During that time (2010), it was a good decision as both rentals and HDB prices shot up afterwards. As of this time, it is still a good decision versus renting. I believe COV more or less reflects the true market value rather than the official valuation which lags the market.


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