Rise and fall of COV - the property mover
DEALS were once forged or broken over it. Headlines roared its record-setting highs. Loved by sellers and loathed by buyers, the concept of cash over valuation (COV) dominated the Housing Board resale market for years - but perhaps no longer.
In the new resale process, this cash premium is not the focus of negotiations. Buyers and sellers agree on a price and get a valuation; the COV is a mere arithmetic outcome.
Yet that is what COV has always been: the difference between price and valuation.
Only when the property market was booming did it take on a life of its own - and, in turn, the power to move the market.
But its beginnings were much humbler. At the very start, there was not even a name for it.
This was in April 1993, when the HDB relaxed its loan policy to let resale-flat buyers borrow up to 80 per cent of the flat's market value or declared sale price, whichever was lower.
Previously, the loan was up to 80 per cent of the "posted price" - the 1984 HDB sale price - which was much lower.
The new rule meant a need to find out what a flat's market value was. Enter valuation, and hence the possibility of a gap between price and valuation: that is, COV.
By 1995, worries had surfaced, but only about the dodgy relative of COV - "paying cash upfront".
Central Provident Fund (CPF) savings could be used to pay for a resale flat up to the purchase price or valuation, whichever was lower.
If valuation was lower than the price, the difference had to be paid in cash. But to save on the sale-price levy, some sellers would under-declare the sale price and ask for more cash upfront.
Though the HDB cracked down accordingly, 1996 still saw reports of buyers paying "a premium of $100,000 to $150,000...above valuation", as in one article in The Straits Times.
But then, with prices easing by 1997 with the Asian financial crisis, the focus shifted to flats going below valuation. Property advertisements blared "low cash!" instead.
And this familiar pattern played out repeatedly. As experts noted, COV's significance rose and fell with the market.
Why was it not a household term in the early 2000s, for instance? Because "the property market wasn't very hot at the time", said OrangeTee head of research Christine Li.
Century21 chief executive officer Ku Swee Yong said: "(COV) always is a very touchy issue during an upturn in the market."
He reckoned it was the 2006 to 2007 property cycle in which COV gained major prominence. "Up till around late 2004, prices were generally around valuation - not a huge difference, perhaps within $10,000 or so."
But by 2007, high COVs were making headlines, such as "some HDB sellers asking for up to $150k above valuation".
When COV sums were so large, they became important in their own right, said experts: to sellers as sources of liquidity, and to buyers as a potential stumbling block.
It was also in 2007 that "cash over valuation" became a standard phrase, recurring in newspaper reports.
Before then, references were simply to sums paid above or below valuation.
Perhaps gaining a fixed name was a sign of COV's growing significance. In July 2007, the HDB released COV data for the first time, in recognition that buyers were focusing on such information.
But the prominence of COV could itself have been encouraged by the profusion of media coverage.
Whatever the case, the idea of COV stuck. And experts think it developed a power of its own.
"When it was high, COV was often felt to be a controversial mechanism as sellers tended to compare the COV they got, instead of the actual price," said R'ST Research director Ong Kah Seng.
Buyers felt a need to chase high COVs, not simply high prices. But when deals closed above valuation, this put pressure on valuations themselves to rise.
And in a declining market, the reverse was true: buyers pushed for prices below valuation, which in turn drove valuations down.
Now, COVs have been taken out of negotiations. That could mean an end to their amplifying effect, and hence a more stable property market, said SLP International Property Consultants' head of research Nicholas Mak.
Sellers, in particular, could take a while to adjust, and might still seek private valuations to get a sense of COV, he added.
But PropNex Realty chief executive officer Mohamed Ismail Gafoor saw a way in which COVs might fade altogether.
The HDB's appointed valuers could follow the practice in the private market, and largely match their valuations to reported sale prices, he said.
That would close the gap between price and valuation - and, by definition, snuff out COV.