With the recent news reported on discussion on the scrapping of the cash over valuation (COV) as reported in CNA, I would like to share a few personal view of the HDB Resale Myth.
1) Sometime we would hear this in the news or the property agent saying: “COV is dropping, it’s a good time to buy HDB resale flat now”.
Yes, COV drops is a good thing as many of Singaporean or PR would consider before purchasing a resale flat. A drop in COV means that they would fork out less cash to purchase the resale flat.
But in the other hand, we tend to ignore the total purchase price of the flat. The purchase price of the resale flat is add up of valuation + COV (let’s ignore the smaller components like stamp duty, lawyer fee etc as this is just one time payment).
Now let see how is the valuation of the flat is done.
Market value is described as the projected amount for a property which should be exchanged on the date of valuation between two willing parties, namely the buyer and the seller, in an arm’s length transaction after proper marketing, with proficient, cautious action and not under pressure. In this transaction, both parties do not have a special relationship with each other, which might affect the determination of the property’s price.
There are many different methods to evaluate one’s property namely:
- Comparison Method – Comparing recent transactions or similar property
- Income Method – Comparing through Rental yields of similar properties
- Cost Method – Often use to evaluate properties with little or no market transactions like Churches, School Etc.
So far, the valuation is being done using the comparison method.
The valuation of the HDB resale flat will continue to rise so long there is always COV involved.
For example, a 4rm flat valuation is $300K, now it is selling $300K + $25K COV (total purchase price is $325K).
The next to be valued at around $325K using comparison method. With a COV $20K, the purchase price will be $345K.
Based on above example, the resale price will continue to raise so long there is COV is involved. This raise in valuation will not be immediately seen as the transaction will take about three to four months to be completed.
2) The interest rate is at all time low (for bank loan)
The bank will usually tied you with a 3 year fixed interest rate after which it will become floating rate. Many buyers will use the current loan repayment as the cue to service the loan which can be as long as 30 to 35 years. An increase of 0.1% in interest rate, there is an increase of about $8 per $100K outstanding loan per month. If there is an increase of 1%, it is to say, the monthly installment will increase by about $80.
These increase amount will be paid via CPF. But if your monthly contribution is less than the monthly installment, then the balance you have to pay with cash (assuming that you have zero balance in your CPF OA).
3) You can still service your loan even when there is a property downturn.
There is always a financial trap called “Margin Call”. It applies to property too. In http://www.moneysmart.sg/housing-property/on-margin-call-for-home-loans-what-is-it-and-how-do-we-avoid-it/, it explained how margin call is activated and how can it be avoided.
Knowing some of the myth in purchasing of the resale flat, careful consideration is needed as below:
1) How much are you willing to purchase the resale flat?
2) How much loan are you going to service?
3) What is the loan period you are going to service?
Do not rush into a transaction when someone tells you that you are getting a good deal. Do your homework first before committing to it. If you want to know more about financial planning, you can attend Mr Tan Kin Lian’s talk on financial planning .
Other myth I had not notice or known HDB Resale Flat, feel free to drop me a comment and I will update it accordingly.