Zen Chee

By Ng Baoying, Channel NewsAsia | Posted: 05 October 2009 0952 hrs

SINGAPORE: Southeast Asia’s largest property developer CapitaLand says it plans to list its retail subsidiary on the Singapore Exchange.

The unit, CapitaLand Retail, will be renamed CapitaMalls Asia. It will manage a portfolio worth S$20.3 billion of 86 retail properties spread across 48 cities in Asia.

Of the 59 existing malls in its portfolio, CapitaMalls Asia will manage 16 in Singapore including ION Orchard. Thirty-two of the others are from China, and the rest are from India, Malaysia and Japan. Eventually, it plans to grow this to 86 malls, of which 50 will be in China.

CapitaLand says the proposed listing of CapitaMalls Asia will enable the group to accelerate the growth of its integrated shopping mall business.

CapitaLand Group’s president and CEO, Liew Mun Leong, said: “Our business model is about an integrated business model that involves investing, developing them…It’s not easy to build a shopping mall, to fill it up with the right tenants and operate it successfully so that shoppers continue to come.”

Lim Beng Chee, CEO of CapitaLand Retail Limited, said: “Our capital structure is positioned for growth. We have a very low gearing upon listing and it gives us a lot of firepower to grow the business going forward. We will continue to be a member of CapitaLand Group – that is, we are able to tap on CapitaLand’s areas of expertise outside the shopping mall business and outside the 5 countries we are operating.”

CapitaLand says it will retain majority control in CapitaMalls Asia after the listing and for the foreseeable future. But it intends to offer an adequate number of shares that it holds in CapitaMalls Asia to ensure that there is sufficient liquidity in the counter.

Donald Han, managing director of Cushman & Wakefield, said: “If you look at the Asian market, certainly, we’ve got groups like Westfield in Australia who’ve done very well in Australia, they’ve also gone into markets like US. They’ve put a stamp on the market.

“If you look at Asia outside Australia, there’re not as many retail mall expert developers who’ve gone into the process of developing and raising funds through the IPO route. So for retail investors wanting to partake in the retail market, there are not many opportunities to invest. This will be one of the very few opportunities.”

He added: “It’s a timely move for CapitaLand, because if you look at the market landscape there are a lot of opportunities in the marketplace at a discounted price. What CapitaLand is doing is to shore up its balance sheet to raise cash and to use CapitaMalls Asia as a platform to acquire, develop and ultimately to manage retail malls in Asia-Pacific.

“In China, the fact that CapitaLand has been there over eight, nine years, it has pretty much tested waters, built a good brand name and reputation. Even among some of the retail developers, it is ranked easily in the top five category. If you look at a name like CapitaLand coming into Singapore, obviously there is an assurance in terms of the quality.”

By creating a listed entity, CapitaLand says the shopping mall business will have significant financial capacity, direct access to capital markets and complete in-house capabilities in retail real estate investment, development, mall operations, asset management and fund management.

CapitaLand says the capital value of malls in China is worth only about S$200 per square foot, compared to Singapore’s S$1,500 per square foot.

“Can you imagine when China’s malls double up in capital value, when the malls are more matured and operating and generating income, you can see the growth potential of this company. The growth in China is to us very, very attractive,” said Mr Liew.

CapitaLand says it does not rule out another listing in the future, possibly in China, should market and regulatory conditions become conducive.

- CNA/ir

You need to know how to calculate the interest you’ll get by leaving your money on deposit for a certain amount of time, but it’s also good to know how financial institutions arrive at the interest rates they advertise.

Interest rates are affected by a number of factors. The Federal Reserve, which is charged with maintaining the stability of the nation’s financial system, raises or lowers short-term interest rates in an effort to maintain that stability. The Fed regularly takes these actions in response to economic ups and downs that the country goes through on a fairly routine basis.

Regular interest rate adjustments

When the economy is growing — companies are profitable, unemployment is low, and consumers are spending money — short-term rates are raised to keep the economy from building too fast and risking inflation. Inflation is when too much money chases too few goods and services, driving prices upward. Raising interest rates slows the economy. Higher interest rates mean higher borrowing costs for individuals and businesses; and that usually means there’s less money to spend elsewhere.

The Fed will lower short-term rates when the economy is contracting — or slowing. Lowering rates makes it less expensive to borrow money. Consumers and businesses can afford to buy more products and services. That speeds up the economy, keeps people employed, and keeps the economy from sinking into a recession. A recession occurs when consumers get tight-fisted with their money and don’t buy the products and services that keep companies afloat and workers employed.

When the Fed cuts short-term rates it is cutting the rate that banks charge each other to borrow money. Those cuts are eventually passed on to businesses and consumers. The same thing happens in reverse when the Fed raises short-term rates.

Other factors and their impacts

Other factors affect interest rates, too, but on a more irregular basis. A crisis involving the foreign oil-producing nations, for example, could have a major economic impact that could affect interest rates.

Long-term interest rates aren’t affected as quickly by economic conditions as are short-term rates, but there is a trickle-down factor and they reflect the impact eventually.

What works for you as a saver works against you as a borrower. When rates are high, you’re earning a hefty amount of interest for your deposits, but you’re going to pay a high interest rate if you need to borrow.

When rates fall, you don’t get much interest on your savings, but it’s a lot cheaper to borrow money.

By David See Leong Kit

HDB’s response “Why we peg to market rates: HDB” ( TODAY Sept 25) to my earlier letter has necessitated my right of reply. (read letter here)

Instead of merely accusing me of being “misleading and illogical”, HDB is expected to be transparent in disclosing fully the actual breakeven cost of new flats in all its projects. After all, these are public housing developed with public funds.

These exasperasting remarks of a couple wanting to start a family sums up the genuine frustrations of young Singaporeans at the sky-high prices of public housing: “How to live in cheaper Woodlands when work is in Shenton Way and parents are in Tanah Merah? The Government must come up with more practical solutions !”

Let me now summarise these two main issues:

(1) Root cause behind high prices of new and resale flats.

In the 1970s, at HDB Marine Parade Estate, prices of 3-room, 4-room and 5-room new flats were $17,000, $20,000 and $35,000 respectively.

In 1990, 5-room new flats cost around $70,000. Such prices then reflected a “cost-based” pricing approach.

But, following the 1994 property bull run, HDB switched to a “market-based” pricing approach. It confirmed that “the prices of new HDB flats are based on the market prices of resale HDB flats, and not their costs of construction”.

In 2000, the total breakeven cost (comprising construction cost, land cost and other related costs) of a 5-room new flat was an estimated $120,000.

However, under the market-based pricing approach, HDB will first look at the prevailing market price of, say $260,000 of a 5-room resale flat. It will then pick a slightly lower figure of, say $200,000 as the selling price of the new flat — regardless of its actual breakeven cost of $120,000.

HDB will then proclaim the new flat buyer is getting a so-called “market subsidy” of $60,000, the difference between resale flat market price and new flat selling price. There is really no “cash subsidy” given to the buyer, and HDB is actually making a profit of $80,000 for each flat sold.

The losses reported in HDB financial statements could well come from “transfer pricing” accounting between HDB, Singapore Land Authority and Ministry of Finance.

HDB’s “market-based” pricing approach is the root cause of prices of new flats and resale flats chasing each other in a never-ending upward trend.

A plate of chicken rice cost $3 in HDB coffeshops and $20 at hotel coffeehouses. It is both illogical and ridulous for HDB to proclaim that every person eating chicken rice in HDB coffeeshops is getting a “market subsidy” of $17 per plate!

(2) Are HDB new and resale flats really affordable?

It is misleading for HDB to merely state “first-time flat buyers use 17 to 29 per cent of household income for their loans, below the international benchmark of 30 per cent” without disclosing the assumptions used.

HDB has since confirmed to me that a 30-year loan period was assumed.

Of course, if you stretch a home loan to as long as 30 years, even private property will become “instantly affordable”.

For a couple with combined $8,000 monthly income, a HDB loan of $500,000 at 2.6 per cent interest and monthly loan instalment of $2,000 may appear affordable. But at the end of the 30 year loan period, they would have coughed up some $800,000 in total capital and interest repayments.

A sensible home loan period would be around 15 to 20 years.

By Neil Chatterjee and Kevin Lim

SINGAPORE, Oct 1 (Reuters) – Singapore private home prices surged 15.9 percent in the third quarter from the previous quarter, the biggest jump this decade, government data showed on Thursday, highlighting fears about a property market bubble.

Worries about dangerously inflated house prices in Asia being fanned by record low interest rates have led to speculation that countries including South Korea and Australia could move to tighten monetary policy. [ID:nSYD487034] [ID:nSEO144752]

Singapore last month acted to cool the property market by releasing more land and making it harder for home buyers to defer payments, but analysts said policy makers were likely to hold off on further steps for fear of derailing a still patchy economic recovery.

Singapore home prices started rising in Q2, analysts say, contrary to a 4.7 percent decline for that quarter shown in the Urban Redevelopment Authority’s index, which is not seasonally adjusted. Huge crowds have been snapping up units at new residential launches in Singapore, with reports of buyers queuing for hours and leaving blank cheques with agents to secure properties.

“The numbers are backing up the anecdotal evidence we’ve seen — if anything they are understating it,” said Vishnu Varathan, an economist at 4CAST in Singapore, commenting on “Policymakers will be acutely aware of the risks of tightening too fast…At this point I think they will wait and see.”

Varathan and most economists expect the Monetary Authority of Singapore to keep policy neutral when it releases its half-year policy statement later this month. Singapore forecasts its economy will contract 4-6 percent in 2009 and sees a subdued recovery likely continuing in 2010.

YET TO PEAK?

Prices of government-built apartments, which house about 85 percent of Singaporeans, rose 3.2 percent in the third quarter from April-June, faster than the 1.4 percent gain in the second quarter, raising the floor for private home prices.

Some analysts think rising house prices in Singapore, Hong Kong and China are yet to peak, given a preference for property among investors and a faster-than-expected economic recovery.

But such strong price rises are unlikely to be sustained in the fourth quarter, when developers were seen releasing more projects and the government would open up more land for development, property analysts said.

Mohamed Ismail, CEO of PropNex, a firm of housing agents, said private home prices will likely moderate and show growth of 2-3 percent a quarter over the next 12 months as developers are wary of provoking further anti-speculation measures.

The preliminary Q3 data had little impact on property stocks, since it often lags actual price movements.

Shares in Singapore’s top property firm CapitaLand (CATL.SI: Quote, Profile, research) were little changed after the data, down 0.9 percent at S$3.69 by 0647 GMT. But the stock has more than doubled since early March, outperforming the Singapore index’s .FTSTI 74 percent gain.

SINGAPORE, Oct. 1 (Xinhua) — Prices for private homes in Singapore rose about 16 percent in the third quarter, estimates released by the Urban Redevelopment Authority showed on Thursday.

This is a sharp rebound compared to the 4.7 percent decline in the second quarter, the data showed.

Non-landed private residential properties just beyond the core central region registered the highest rise of 19.1 percent in price, while prices in the core central region increased by 16.2 percent.

For the rest of Singapore, prices also went up by 15.4 percent.

In comparison, prices for all three regions saw a fall of between 2.3 and 5.2 percent for the second quarter.

The estimates are compiled based on transaction prices given in caveats lodged during the first ten weeks of the quarter, supplemented by information on the number of new units sold.

To meet increased demand, HDB will increase its Build-To-Order (BTO) supply from 8,000 units to 9,000 units this year. 5,000 new BTO flats will be launched over the next 3 months. In addition, HDB has also launched a Sale of Balance Flats (SBF) exercise to offer another 2,132 flats for sale.

So far, HDB has launched 3,945 BTO flats from Jan to Aug 09. Flat buyers can look forward to another 5,000 new BTO flats over the next 3 months in various locations. This translates to an average of 1,500 new flats monthly, with at least 2 BTO launches each month.

In addition, HDB will launch a Sale of Balance Flats (SBF) exercise today, and offer another 2,132 flats for sale. The SBF consists of flats accumulated from earlier BTO exercises, surplus SERS replacement flats, repurchased flats etc. It replaces the existing Balloting Exercise, Quarterly Sales and Half-Yearly Sales. HDB will only conduct the SBF as and when there are sufficient numbers of such flats accumulated.

For this SBF, there is a wide range of flats in terms of location, flat type and price. HDB expects very strong interest for these flats and they are likely to be many times oversubscribed. Buyers who would like greater certainty in getting a new flat should apply under the BTO, which is HDB’s primary mode of flat offer.

Flat Supply under the BTO System

The BTO system was implemented after a review of the method of selling flats in 2001. Prior to this, HDB sold flats under the Registration of Flats System (RFS). Every buyer in the queue was promised a flat, resulting in a waiting time of 7 years at its peak. However, the 150,000 households in the queue did not reflect real demand. The queue disappeared when the Asian Financial Crisis hit, and HDB was left with 20,000 unsold flats.

Today, HDB will build new flats under the BTO system only when a good majority of flats in a project are booked. The BTO system allows HDB to build according to real demand and to respond flexibly to the needs of flat buyers. It also provides greater certainty to flat buyers. Majority of first-time applicants have a chance to select a BTO flat within two tries. Flat buyers can look forward to possession of their flats 3 years after booking.

The BTO system allows HDB to ramp up new flat supply quickly when demand is high. Conversely, when demand is low, HDB will scale back to avoid oversupply.

Flats Offered under SBF Exercise

2,132 flats are being offered under the SBF today. Spread over 24 towns/estates, the flat supply comprises 121 units of Studio Apartments (SA), 58 units of 2-room, 345 units of 3-room, 1,184 units of 4-room, 281 units of 5-room, 32 units of Executive flats, as well as 77 and 34 units of S1 and S2 flats.

Prices start from $97,000 for SA, $111,000 for 2-room, $118,000 for 3-room, $178,000 for 4-room, $238,000 for 5-room and $324,000 for Executive flats. Buyers looking for more affordable options can consider the flats at Jurong East and Jurong West, where prices of 2-room, 3-room, 4-room and 5-room flats range from $111,000 to $124,000; $118,000 to $227,000; $219,000 to $327,000 and $238,000 to $385,000 respectively.

At least 90% of the flat supply (excluding SA) for Public Applicants will be set aside for first-timers. No additional chances will be accorded to repeatedly unsuccessful first-timers. Details of the flat supply are provided in Annex 1.

First-timer applicants who do not select a flat when their turn is due and there are flats for selection will be considered as having rejected one chance. First-timers who reject 2 chances to select a flat will have their first-timers priorities removed for a one-year period for all HDB sales exercises.

Wide Choice of Flats

Flat buyers are advised to exercise financial prudence and buy a flat that they can afford. Buyers who do not find a flat of their choice in this SBF should apply under BTO, which is HDB’s main mode of supply. In Oct 09, HDB will launch 2 BTOs in Jurong West and Sengkang, with a total of more than 1,000 flats with a wide range of flat types.

Flat buyers can also consider buying a resale flat where there is a wide range of choice in terms of budget and location. Eligible first-time flat buyers can enjoy a CPF Housing Grant of up to $40,000. In addition, the Government also offers extra help with the Additional CPF Housing Grant (AHG) of up to $40,000 for first-time homebuyers with average monthly household income of $5,000 or less.

The removal of schemes that allowed home buyers to defer mortgage payments until the property has been fully built is likely to have the most direct impact on property speculation, say consultants and analysts.

Interest absorption and interest-only loans – both of which remove or reduce regular instalment payments for uncompleted properties – have been axed with immediate effect.

The step was announced in Parliament yesterday by National Development Minister Mah Bow Tan and is part of a package of measures aimed at restoring stability to a property market that is booming amid a recessionary environment.

Property consultants said the withdrawal of these two loan types will have the biggest effect on housing demand.

‘Removing the interest absorption scheme (IAS) will definitely affect sentiment and consequently demand and home sales,’ said Ms Grace Ng, deputy managing director of property consultancy Colliers International.

But she added that the adverse effect is likely to be limited. ‘There are many other factors fuelling the property market jump: Low interest rates, a lot of liquidity, the stock market boom, and attractive property prices.’

Industry watchers and bankers agreed. They say fewer people have been opting for interest absorption loans in recent months, because homes bought with these loans are usually more expensive.

‘It is unlikely that these measures will significantly depress property prices because under the interest absorption scheme, prices are marginally higher by about 2 per cent to 3 per cent,’ said Mr Chia Siew Cheng, head of the loans division at United Overseas Bank (UOB).

OCBC Bank’s head of consumer secured lending, Mr Gregory Chan, expects a ‘knee-jerk response from potential home buyers’, resulting in a slowdown in the number of new transactions in the short term.

But whether sales will be curtailed for good ‘depends on other macro factors such as property supply and demand, economic recovery and developers’ pricing’.

Speculators, the group that the Government is hoping to weed out from the market, are most likely to be hit by the withdrawal of such schemes.

‘Most genuine buyers take up the normal progressive payment scheme,’ said Kim Eng property analyst Wilson Liew. ‘Those who would be affected by the move are speculators and some of the younger couples who are waiting to accumulate more wealth between the time they buy their unit and its completion.’

The move will benefit genuine buyers and investors, who can now make their purchases without ‘excessive speculation pushing up prices to unnatural levels’, said CB Richard Ellis Research executive director Li Hiaw Ho.

IAS gained favour after the popular deferred payment option was scrapped in October 2007. In recent launches, they have been taken up by about a quarter of buyers.

Most banks in Singapore have tied up with property developers to offer interest absorption loans, including DBS Bank, UOB, HSBC and Maybank. Banks offering interest-only loans include DBS, UOB, HSBC, Standard Chartered and Maybank.

‘Purchasing a property and taking up a housing loan are long-term financial commitments,’ said Mr Mah in Parliament yesterday. The removal of the interest absorption and interest-only loans ‘will encourage prospective home buyers to consider carefully their ability to afford the properties over the long term and not rush into any purchases’.

By Fiona Chan & Gabriel Chen
fiochan@sph.com.sg
gabrielc@sph.com.sg

The Government has moved to rein in the fast-rising private property market, banning a popular scheme that allowed cash-poor buyers to defer paying the bulk of their purchase price until the property was completed.

With immediate effect, the interest absorption scheme (IAS) can no longer be offered with new properties for sale, National Development Minister Mah Bow Tan said in Parliament yesterday.

He added that the Government is also resuming land sales next year, a move that will increase the supply of new sites and further cool rising prices.

It is doing this by re-introducing a confirmed list of sites that will be put up for sale according to a pre-determined schedule, regardless of developers’ interest.

The Government also announced it will not extend measures introduced in January’s Budget to aid developers in the recession. These included deferring property tax and allowing developers more time to complete their housing projects.

These measures come after weeks of speculation over how the Government would react to an unexpected property boom that has resulted in record sales volumes and a dramatic run-up in prices.

Developers sold 10,000 units in the first seven months of this year, more than the 4,300 units sold in the whole of last year. In July alone, they sold 2,767 units – the highest monthly tally on record.

Private home prices are now about 10 per cent to 20per cent above the lows in the first quarter of the year. At selected projects, prices have rocketed 30per cent.

Experts said the immediate impact of the measures would likely be private home prices stabilising, or even slipping, for the rest of the year.

‘The moves will certainly take some wind out of the property market, but they will not kill it,’ said Cushman & Wakefield managing director Donald Han.

‘The Government wants to keep the momentum going, but at a slower rate, as we are indeed in a recession.’

Buyers have been flocking back to property for a lack of what they see as safer investment alternatives.

Yesterday, Mr Mah said the Government was seeing ’signs of heightened speculative activity’ that, if unchecked, could lead to excessive speculation and to a bubble that would eventually burst.

Low interest rates have encouraged buying, but this could lead to a rising spiral of higher demand and prices. This would make the property market vulnerable to the continuing risks in the global economy, said Mr Mah.

‘Should growth turn out weaker than expected, property buyers and speculators could face capital losses as the market corrects,’ he said.

‘Conversely, if the recovery stays on course, interest rates will eventually rise and drive up financing costs, with severe implications for those who overextended themselves.’

The IAS is popular with property speculators because it allows them to fork out a downpayment of only 10 per cent or 20 per cent when buying a unit, and nothing more until the property is completed about two years later. In between, they try to sell it off for a profit.

A sample survey of recently launched projects by the Urban Redevelopment Authority showed the take-up rate of the IAS was about 20 per cent to 25 per cent.

The Government is also disallowing a close relative of the IAS – interest-only housing loans – with immediate effect. These loans are designed so that the buyer pays a very low instalment until the property is completed.

The removal of the two schemes applies across the board to all private residential developments, the Ministry of National Development said yesterday.

The only exemption is for uncompleted private residential projects in which the units had already been offered for sale under the IAS before yesterday.

Jones Lang LaSalle head of research for South-east Asia Chua Yang Liang said the removal of these schemes would cool sentiment and remove inflated demand, if any.

Barclays Capital economist Leong Wai Ho warned that there could be more curbs in the pipeline if the authorities were adopting an incremental approach to deflating house prices.

Still, developers chose to view the move positively.

The Real Estate Developers’ Association of Singapore said yesterday the changes were unlikely to have any significant impact on developers’ future launches. It added that the need for the two schemes had diminished now that the market was ‘relatively firmer’.

Potential buyers such as retired civil servant Karen Lee, 55, are happy.

‘With speculation, prices go too high, and that makes it hard for the younger generation to buy houses,’ she said.

By Joyce Teo
joyceteo@sph.com.sg

Willing buyer, willing seller – few people get fazed when private properties change hands this way.

But unhappy HDB flat hunters, clearly not in the ‘willing buyer’ category, have recently complained about the affordability of public homes as resale flat prices go up, up, up.

This is because these days, the agreed price for an HDB resale flat typically includes a cash premium on top of the official valuation determined by an HDB panel of independent professional valuers.

Any premium – known as the cash over valuation (COV) – above this valuation has to be paid upfront in cold cash. This favours a buyer who is cash-rich.

A Straits Times Forum writer has even called for a ban on such cash sums.

The COV premium emerged because buyers chose to pay more than the market value of the resale flats. It is not imposed by the Government.

There are some deals done below valuation but most HDB flats have not been immune from the current rising property market: Strong demand and low supply lead naturally to substantial rises in COV sums.

How high are COV sums now?

COV sums reportedly doubled in July this year, to about $10,000-$15,000 for five-room and executive flats, from a median level of $5,000 in the second quarter.

The rise is still gathering pace, with experts saying they are seeing more deals done at higher COV sums.

In popular towns such as Bukit Merah, Ang Mo Kio and Sengkang, sellers always ask for upfront cash, that is, COV, they said.

For instance, in the Jalan Bukit Merah area, one four-room HDB flat seller is asking for a COV sum of $45,000 on top of the $440,000 valuation.

Classified advertisements for HDB resale flats in Sengkang show ‘asking COV’ of $38,000 to $45,000.

Meanwhile, the latest HDB data, which is for the second quarter, still shows the median overall COV for flats in Bukit Merah and Sengkang to be zero.

Experts say the pick-up in the HDB market intensified only in the past few months. And the optimism seems to have spread to farther-out towns.

Last week, the seller of a high-floor Bedok North executive flat received an offer from a buyer keen to pay a $58,000 COV sum on top of the $520,000 valuation – after just the first viewing.

PropNex data for last month showed that a five-room flat in Punggol went for $450,000, including a COV sum of $70,000, while an executive maisonette in Pasir Ris went for $580,000, including a $65,000 COV sum.

ERA data showed deals done with COV sums of $60,000 in Choa Chu Kang and Jellicoe Road, though the firm said the majority of its resale deals done above valuation were sealed at more reasonable amounts of $15,000 to $30,000 above valuation.

When did buyers start paying COV?

In the private market, if buyers pay more than what the bank thinks the property is worth, they also have to fork out the extra sum in cash.

In the public housing market, COV emerged when HDB announced that it would arrange for valuation of all resale flats for the purpose of mortgage loan financing, said the CEO of C&H Realty, Mr Albert Lu.

That was in 1993. Prior to that, the maximum loan quantum was pegged to the HDB’s 1984 posted prices.

A decade later, COV largely disappeared for a while when the private banks got into the HDB loan market. The banks were ‘very willing’ to match the HDB sale price when they got in and competed for loans, and as a result there was no COV, Mr Lu said.

But that had its own problem. Prices shot up and an illegal cashback practice – in which a flat’s price is inflated so the buyer can get a bigger housing loan – became rampant, he said.

As a result, in 2005, the HDB stepped in and made it compulsory for banks giving loans on Housing Board flats to use valuations only from the HDB’s panel of approved valuers.

The HDB and banks provide a housing loan of only up to 90 per cent of the market valuation or the transacted price for HDB flats, whichever is lower.

An HDB spokesman said the cap on the loan quantum is a prudent measure required by regulators.

‘It helps to protect the lender by providing a buffer so that a drop in value of the property will not immediately result in negative equity (the outstanding loan amount exceeding the market value of the property).’

He added that it is also in the interest of the flat buyer, as liberal credit will generally fuel price increases.

The headline-grabbing COV sums started to be noticed only during the market run-up in 2006-2007, said ERA Asia Pacific associate director Eugene Lim. During that time, some buyers were willing to pay COV sums of $100,000 to $150,000.

The HDB recommends that sellers do the valuation upfront before selling their flats, so that they know their properties’ market value.

Mr Lim said this is to help the seller set a reasonable selling price. But sellers will naturally want to get a COV sum, the higher the better, he said.

Is COV necessary?

‘I do not think COV is a good idea as the valuation has already taken into account the property’s attributes like its location, condition and any renovation done,’ said Mr Lim.

This is particularly so when HDB resale prices are at a new peak, he said. HDB resale prices are at a record high, after rising some 35 per cent from the start of 2007.

‘With COV continuing to increase, it does signal more investment in the HDB market,’ said Mr Lim.

‘But it takes two hands to clap. There has to be a willing seller and a willing buyer.’

In a way, the COV measures how overvalued an HDB flat is, given that the HDB or the banks will lend based only on the valuation. It is then up to the buyer to decide if he wants to buy the flat.

Mr Lu doubts sellers will stop asking for COV in the near future, ‘unless we see another economic crisis (that is, a double dip) or a major disease epidemic’.

COV did disappear towards the end of last year when many large HDB flats were sold at or below valuation, he pointed out.

It will be hard to get rid of COV, as it is all a matter of supply and demand, he said.

‘Right now, COV has gone up because of high demand and low supply.’

Ultimately, the buyers have a choice. ‘They can always walk away if the COV sum is too high,’ said Mr Lim, adding: ‘At the end of the day, you are buying an HDB flat. Why pay so much cash?’

By Joyce Teo

IN JANUARY, as the global financial storm lashed Singapore shores, fears took hold that large numbers of cash-strapped home owners might default on their monthly mortgage instalments, as businesses went belly-up and jobs were lost.

DBS Bank went out of its way to calm the jitters by offering to resurrect the interest-only payment scheme to allow borrowers to make only interest payments on their home loans, to give them breathing space to sort out their finances.

Only months later, in a surprise to many, the tide turned and there was a huge revival in the residential market. The gloom lifted as confidence grew and buyers rushed back to snap up properties – despite the stress that continued to be felt in the corporate sector.

The statistics are impressive. In the second quarter, 10,184 HDB resale flats changed hands – up from 6,446 units in the first quarter and 7,763 units in the same quarter last year.

This, in turn, triggered a boom in lower-priced condos, as HDB sellers upgraded to private developments.

For many, buying an HDB resale flat has turned out to be a sure-win investment. Despite the onset of the global financial crisis two years ago, HDB prices have scarcely fallen. In fact, they are up 35 per cent since 2007.

And why not? As one housing agent observes, even though the prices of HDB resale flats are high, they have become more affordable. Buyers need only to fork out a down payment – as low as 10 per cent of the purchase price – in order to qualify for a bank loan to buy their dream homes.

Some observers have been quick to attribute the hike in housing prices to the growing number of foreigners becoming permanent residents, which makes them eligible to buy HDB resale flats.

For many new permanent residents coming from countries such as China, where payment for a house must be made in full by cash, Singapore is a paradise. It is impossible for them to get an appointment to see the bank manager in their home country, let alone get a loan if they do not have the necessary ”guanxi” or connections.

In Singapore, as long as they are gainfully employed and have some savings, they have a bevy of banks competing for their attention and offering them loans on attractive terms to help them buy their homes.

But stock traders offer a different explanation for the exuberance in the housing market. Could the explanation be a little more sinister? Does the argument about buying an HDB flat because past trends show rising prices have a familiar ring to it?

In 2002, to make up for the loss of business elsewhere, banks in the United States started to extend huge loans to home buyers with the cheap credit supplied by the US central bank to fight the bursting of the dot.com bubble.

The US housing market record was even more impressive than HDB’’s, with home prices experiencing an almost uninterrupted upswing since World War II.

The upshot of the lending frenzy: Home owners borrowed ever bigger sums against their properties to finance their consumption, while even those with doubtful credit histories were extended huge housing loans too.

That reckless drive caused grief for the US, as a huge number of mortgages turned sour two years ago and unleashed a credit crisis so severe it almost caused the global financial system to collapse.

For some, there is a striking resemblance between the boom in the US housing market in 2002 and our own real estate rally now.

Let us recognise that our housing boom might have been shaped by events far beyond our shores – the loose monetary policies implemented by US Federal Reserve chairman Ben Bernanke, as he trimmed interest rates to almost zero, in order to combat falling US prices.

Because the US dollar is the world’’s reserve currency, this has the effect of sharply depressing interest rates around the world, including Singapore, where POSB now pays its depositors a paltry 0.125 per cent interest on their savings.

In such a situation, it is not surprising to find depositors looking for investment opportunities, while banks sit on huge swathes of cheap funds that they are desperate to lend out.

Like the US situation in 2002, banks in Singapore have refrained from lending aggressively in the corporate sector, as recession-hit businesses struggle to regain their footing.

Instead, they have also turned to the home loans market to make up for the slack in business.

But if this housing rally is financed by the cheap credit boom provided by Mr Bernanke, it is only temporary and will screech to a halt as soon as he starts to remove the trillions that he has poured into the global financial system.

For banks lending merrily on the real estate market with few strings attached, there is the chilling prospect that the fears that emerged in January, over possible mortgage defaults, might be realised this time around.

What can be done?

Rather than press the HDB to build more flats that might, in turn, create a housing glut as the economic cycle plays out, let us insist that our lenders tighten their generous lending terms.

For a start, they should consider raising the down payment, which a home buyer has to fork out before he qualifies for a mortgage, from the current 10 per cent to 20 per cent or even 30 per cent of the purchase price.

Given the important role banks play in our economy, such a move would be prudent, given the danger of a bubble building up in the real estate market.

Sure, this move may mean a delay for some in buying their dream homes, as they will have to save longer to make the down payment.

But it will ensure that the Singapore dream of owning one’’s home does not turn into a sub-prime style nightmare for them and for the rest of us.
By Goh Eng Yeow
engyeow@sph.com.sg

Cai Jin runs every Monday and covers financial matters and corporate governance issues that can affect investors. The two Chinese characters marry wealth with good fortune – the two crucial factors that any investor needs to prosper.