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Why Fewer Buyers are Paying COV for Resale HDB Flats

This article is a transcript from an podcast that premiered on Channel News Asia's Daily Cuts interviewing our Chief Research Officer Nicholas Mak. The transcript has been edited for readability on this web platform.

Why fewer buyers areWhy fewer buyers are paying COV for resale HDB flats paying COV for resale HDB flats
CNA's Daily Cuts - Why fewer buyers are paying COV for resale HDB flats

Singapore today with Lance Alexander and Daniel Martin.

It's our Singapore today top story this hour and that has to do with fewer resale HDB flat buyers paying above value for their units. In fact, the proportion of such buyers halved from almost 30% in the fourth quarter of 2022 to 15% in the same period of last year. And among those who did pay COV or cash over valuation for their flats, the median amount was about $30,000 and the majority of resale HDB flat buyers did not have to pay any COV.

Yeah. Meantime, over in the private property market, new private home sales. Guess what, it hit a new low in December, 135 units were sold last month. That was an over 80% dip from November. To break things down for us, we've got Nicholas Mak once again back with us, Chief Research Officer, at the property portal

Nicholas, welcome back to Singapore. Today high interest rates, we've got more flat availability and possibly a buyer's market. Could these be the reasons why fewer resale HDB flat buyers are paying above value for their units?

Well, first of all, COV is not something that we should take as something that is found in the normal working market. It normally comes in when we have a situation where demand is much higher than supply, so some buyers are willing to pay above the valuation and this is usually people who might have more cash. Not everyone can afford to do that because they can only get loans based on either the transacted price or the valuation of the property.

So we see higher COV, or more cases of COV, and even the quantum per transactions can run above $50,000 or $80,000. During the COVID period in 2021-2022, and the government has tried to put in measures to try to hold the market, the HDB resale market, and one of those measures is actually to release more BTO flats. They've done that last year and the year before that and we are starting to see the results of those measures, which is slower prices and also declining proportion of transactions with COV.

Is this a reflection of wider things to come? Are people just not willing to pay COV anymore?

It's not so much willing or not willing. Because yes, it also depends on whether or not the buyers are desperate enough or not. If let's say they have choices, for some of the buyers, especially if they are a bit impartial, whether to apply for a BTO flat or to buy a resale flat, that means they're not really that urgent. And there are more choices among the BTO exercises. So some of them may actually exit the HDB resale market.

That reduce the demand in the resale market, so we are starting to see a new equilibrium, which is why the number of cases of transactions with cash flow valuation is declining.

So when it comes to COVs, you'll still say that if it's a very popular area it will still happen?

If you still have a supply demand imbalance, yes, it can happen. COV also occurs if let's say the prices that the buyer is willing to pay, is rising faster than the valuation. That is why you have COV. If let's say one reason why you might not have COV in the private housing market is that the valuation very often can match the transacted price. So there is no COV in the private market. But in the HDB resale market, HDB can influence or has a say whether or not they approved the valuation, so you can have cases of COV in the HDB resale market.

I'm curious, do you think we extrapolate from this and then point to the idea and say that this is an indicator that flats are becoming more affordable?

Yes, you can say that. They can point towards that direction that they are more affordable, but there are few factors they need to look into it. One of them is the price of the flat as a ratio of that household income.

So HDB flat is the most affordable one and especially HDD BTO flats. They are very affordable because the government has given quite large discount of the price of HDB resale flats. So yes, we can say that it's because flats are more affordable nowadays.

Ok, so let's talk about the resale HDB flat prices for 2024. How are they looking? What do you think is going to happen this year?

Well, I think that the slower growth in HDB resale flat prices has already started last year. Each quarter we see below 2% rate of growth in 2023. So that brings the entire year's growth to just 4.8%. Now this is half of the rate of growth in 2022, where HDB resale price index increased by 10.4%.

So going into 2024, I don't think that HDB resale prices is going to decline, unless we have a big financial shock or a recession which are not on the cards. So HDB resale prices will still grow probably to the tune of about 3-5% for the whole of 2024.

Unfortunate to hear that. But I'm curious, at the end of the day, do you think COV still has a place in the local property market?

Well, I think it's something that wouldn't be entirely stamped out because this is a price that the buyer is willing to pay. So it's it's based on the negotiation between buyers and sellers. If let's say the seller is asking for a very high COV, and buyers have many choices, they can simply go to the next HDB block or go to the next property or even just apply from the government. Then if the seller, finds that my COV is too high, maybe I should lower my price or don't ask for COV at all, then I can sell my property. So it's all a matter of supply and demand out there. If, let's say, supply and demand are more balanced, then we're going to see much fewer cases of COV or maybe none at all.

Let's turn to the private property market. New private home sales hit a new low in December. It's the lowest since January 2009, following the global financial crisis. Nicholas, how significant is this dip?

I think we mustn't just take one month's transactions and then say that's what's going to happen for the rest of 2024. Because December is usually the lull period, where people go away for Christmas, you got school holidays, so typically transactions at the end of the year tend to be a bit lower.

Another reason is, developers are well aware of that. So they actually haven't launched any major projects and they're all saving their projects to be launched this year. So transaction volumes in December last year was exceptionally low, partly because developers only released 36 private housing units for sale, for the whole of last month and they sold 135.

Most of them are from projects that were already launched previously. I think that this is just a bit of a statistical blip, I mean the sales are in December. Going forward we're going to see more normal numbers, I would say normal numbers that can range between 300 to even 1000 over units sold depending on the projects. Because right now there is roughly about 30 to 40 residential projects that are lined up to be launched in the next 1.5 years. So 20 of them could be launched, which we could see developers releasing about 10,000 private housing units. In certain locations where there are no new launches for a while, when the developer launched 1 project, Jurong East is one example. You see a lot of people queuing up to buy that project units in that project which will boost the sales volume in that month.

What we were just discussing, the whole COV trend and the dip there, does that have any impact on what we've just been discussing as well with the private property, home prices. Any relationship potentially?

Yes, there there is. They're they're interlinked. Especially for the COVs of larger flats because some of these are the owners when they sell their flats, they have to buy another property to live in. Be it another HDB flat or in a a private condominium or private housing unit. So as a result if the owners and sellers are getting no COV or lower prices, then it's going to limit their purchasing power, their housing budgets for the next property.

In other words, some the these HDB upgraders could be more price sensitive. They may buy something that's either cheaper or there is something that is smaller going forward. So this could ,if let's say it's a industry wide trend, see a slower growth of private housing prices.

Let's talk about some new launches when it comes to private home. It's going to kick in in a matter of months, are you expecting the property sales then to pick up?

Yes, I think property sales would pick up. There's already one or two projects that is going to be launched in January. And so in the month of February, developers might slow down, especially the first part of February because of the Chinese New Year. After that you take off with a bang again, there will be more launches. Yes, I do expect more projects to come out and home sales to pick up. However, it also depends on the kind of prices that developers are asking for in their new projects.

Bear in mind, with all the cooling measures in place, most buyers are locals. Over 80% of the buyers are Singaporeans, sometimes in certain projects, even up to 95% of the buyers are Singaporeans, the rest could be permanent residents. The cooling measures has basically pushed foreigners to the sideline and some of these Singaporeans, like we mentioned earlier could be price sensitive, so your developers will have to take that in mind when they launch their projects.

Can we quickly ask you as well about the number of property agents in Singapore that continues to go up despite these slower home sales. Why are people so attracted to the property sales sector?

I think it's partly marketing. Marketing by the property agencies, especially some of the team leaders who make it sound like it's easy money. That says you know, you could earn 1 or 2% commission, sometimes more, if you were to become a property agent. So if you were to close one deal a month, you could be earning more than your peers.

And then the other thing is one of the lures that they often put out to attract potential new agents, is the lifestyle. You could be owning a Porsche or or Mercedes-Benz. Well your your classmates are still struggling.

You've seen this! Nicholas, you have actually seen this first hand?

Yes, I have seen it. They are using money to try to recruit people. I have seen, yes, I have seen it with own eyes. I hear it with my own ears, the kind of sales speech. It's basically out there.

So in reality, how many of these new agents actually sell properties in a month?

Now, as a new agent, it tends to be aware of struggle because they are not that experienced, so they may sort of become like, they don't call it an intern but it's like you're interning. You're shadowing more experienced agent so you become the runner. You run around with it, you learn, and then hopefully you have to persist.

There are people who join the agencies and then after three months, six months or so and within the year they quit. Because they find that that is not the kind of work they want. You must be prepared to work on weekends as well and sometimes after hours, after 6:00 PM. Take for example, the potential buyer wants to view that HDB flat after 7:00 PM, you have to be there to open the door for them.

Yeah, if you want to see all, you have to do that. Well, weekends and long hours. As well of artificial intelligence taking over certain job roles, insurance agents is one of them. So as real estate agents potentially actually.

Potentially yes. It depends on whether someone might need to be there to open the doors. Because property is such a big ticket item, people do want to be served by another human being instead of an apps on the phone. They want to be able to ask questions. They want to be assured they want to hold someone accountable, especially if you're going to sign a check with many zeros behind it.

Yeah, true. And and how difficult are these exams that these property agents need to sit for? Is it just one exam or a few exams you need to pass?

There's a few papers that they have to pass, but then you don't have to have a tertiary education. That means don't need to have a university degree in order to sit for the exams. I think that if you pass your own level, you can qualify to study and sit for the exams.

And you can do it in a matter of months? Any idea how long it could take?

Well, it depends on how fast the person can absorb and study. Yes, it can do it within a year and it also depends on the exam dates, the scheduled dates. Because there are people who do fail and then you have to retake and retake so it could take sometimes more than a year.

Fascinating stuff indeed. What a discussion. Thank you so much, Nicholas, for joining us. That's Nicholas Mak Chief Research Officer of property portal You'll be able to hear this entire discussion again on podcast.




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