What is HDB COV? What should buyers note when considering the concept of COV?
Aaron hardly discuss HDB not because it's an unimportant market or that there isn't much to discuss, but it's been that HDB prices have been 'wrong' for a while. Part of that is also down to COV. This post will shed some light on what COV is and give buyers more knowledge and power to decide the best way ahead of themselves!
HDB Prices & Buyers
There has been minimal discussions about HDB transactions as prices appear to be 'wrong' in recent times. Also, it's important to know who are buying HDB resale units and why. Based on observations, most of the buyers fall in the following categories:
New residents of Singapore - 3 years PR
PR turning Singaporeans
Singaporean couples getting married and not willing to wait for BTO
There are less upgraders from a smaller HDB unit to a more spacious one, as upgraders are upgrading into private property. Previously there used to be significant cases of people switching houses, maybe from a 3-room HDB to a 5-room HDB. Nowadays, most changes are from HDB to private or to EC.
COV
The main topic of the day: COV. What is COV?
COV stands for Cash Over Valuation and is the amount of cash that is to be paid above the HDB valuation price to make up the resale price.
Resale Price = HDB Valuation Price + COV
Before, sellers would do the valuation and then add their preferred COV on top of the valuation to form the resale price they are asking for. The government has actually introduced policy changes to eliminate the term and concept of COV.
Now, sellers are not allowed to do valuation, and instead the buyer & seller first agrees on the resale price of the unit and the buyer pays an option fee to the seller for the option to purchase. This option fee ranges from $1-$1000 and usually is set at $1000 as a guarantee to the seller in case buyers would like to withdraw after HDB's valuation.
After getting this option to purchase, the buyer would get HDB's valuation of the unit, and here one would be able to tell if there is any COV for the transaction and how much the COV would be. The buyer can then make the decision to go ahead with the purchase or to forgo the option fee if one deems the COV too high to go ahead. After the government policy change, COV has become a rare occurrence.
Opinion on COV
Aaron holds his own opinions about COV and believe it's something that is not good for the society and community as a whole. The rationale of HDB and public housing is for providing 'affordable, quality housing and a great living environment where communities thrive', and thus help all income groups afford a house. If there is always COV in a transaction, it will make it hard for buyers to purchase their HDB unit without Cash on hand. With a HDB loan, it's actually not required for a buyer to have cash down. And thus, with COV always in the picture, some of the population would not be able to make their purchase due to a lack of readily available cash. COV therefore does not match with the housing policy in Singapore and is an unhealthy phenomenon. For example, a buyer looking for a 3-room unit would likely not have a high income, and in that case, it's hard to fork out an additional 20 or 30k COV.
That being said, Aaron also recognises the need for sellers to get the best price for their unit and thus applauds the government policy shift to downplay such effects.
COV Data based on Transactions
In recent times, COV is pretty high but not applicable for every unit. As agents are able to see the valuations of units, it's easier for a competent agent to judge and understand if there might be COV for listings buyers are interested in and if they are even worth viewing in the first place. When sellers are asking for a high COV, it's obviously a bad thing for buyers looking for a house to live in.
Looking at the transactions of units sold, Only 20-30% of them have COV, but when looking at listings around 90% of them are asking for COV. Of these units that are asking for COV, a majority are units that cannot be sold off. It's thus not easy to find sellers who are actually seriously selling at the correct price.
Essentially, Aaron does not encourage buyers to pay COV at all. The main thing to ask oneself when considering to pay COV is if you are able to later sell at a valuation + COV price in future?
What buyers should do
With the understanding of COV and how things work in the industry, buyers really need to vet their units properly and understand the valuation of units in the area they are looking at.
It's far better to pick and choose units at the correct pricing as it's not worth paying a COV of 30k and upwards. Instead of trying your luck, and potentially losing option fee of 'only' $1000, we recommend engaging a professional and competent agent to help you take a calculated risk. By understand valuations and pricing, a competent agent can help prevent buyers from unnecessarily losing their option fees and wasting time in their search for a property.
A last tip to buyers: Not all estates have COV and it's always important to do one's homework
Listen to Aaron discuss COV and help you understand the best moves you can make as a HDB buyer!