New HDB Rules Will not be Effective in the Long Term

To reverse the impact of the "Cash over valuation" practice in HDB resale transactions, arguably one of the major factors behind the HDB flat price hikes over the last decade, HDB decided to implement new rules and put COV to rest for good. The new rules are:

-HDB will publish daily prices of resale transactions as soon as they are registered, instead of fortnightly after the transactions are approved.
-HDB will only accept valuation requests from resale flat buyers (or their appointed salesperson), after the buyers have been granted an Option to Purchase (OTP) by flat sellers. This change will take effect from 5pm, 10 March 2014.
-Under the new rules, buyers who are granted OTP will have 21 calendar days to exercise the OTP to adjust to the new procedure.

What is OTP?

Under the new rules, resale flat buyers will be expected to be more cautious than before because they have to apply for a Option to Purchase (OTP) before a valuation of the flat can be released. The OTP is an agreement between the seller and buyer of their agreed negotiation price to protect both parties in the event of a no-deal. The components of the OTP are as follows;

Option Fee - An amount not exceeding $1,000
Deposit - An amount not exceeding $5,000
(Option Fee + Option Exercise Fee = Deposit) 

Most flat hunters probably do not know a flat deposit can be as low as $100 because the requirements state an amount not exceeding $6,000 in total. It is neither a minimum sum nor a fixed amount. Needless to say, the seller will expect maximum deposit because it highly benefits him as he is entitled to exercise his option to keep the deposit if the buyer bow out on the deal. On the buyer's side, the OTP protects his interests by locking in the option to purchase the flat at an agreed price. That prevents the seller from selling to another higher bidder or change his mind and decided to increase his selling price later.

How are the new rules expected to work?

The new rules place more pressure on the seller because the actual valuation of the flat will be released only after an OTP is established. If the valuation of the flat is lower than the agreed price, financiers will only loan up to the valuation and the buyer will be expected to fork out the balance in cash - or risk losing his deposit if the seller decided to exercise his option (which he normally will).

Will it work?

In my opinion, the new rules make it a little more exciting for the buyer but if the intention of implementing these is to cool off a market, it will not perform as well as expected. As the buyer (as well as the seller) has access to the latest transactions of nearby flats, he has a good but rough feel of the valuation of the flat he set his eyes on. If the seller is a typical ex-COV asker, he will simply disagree to sell at the "market rate" (according to latest relevant transactions) and the buyer will have to increase his offer, bearing in mind any increase is likely to require cash from his pockets. It will be a blind estimate, because the actual valuation report is not available, but it will not be very far off. Such a situation clearly suggests, the new rules do very little to prevent another flat sale with a huge COV packaged in another form.

So while I agree with most "expert analyses" that prices of resale HDB flats will be dropping in short term, I do not agree that is down to the new rules because the market is already heading south (also predictably) even before the new rules are implemented.  The unfamiliarity of the new rules will be a complement to bad market sentiments but it will be ineffective as a role of a market cooling component when the market picks up again.

What's better?

The new rules will only serve to suppress but not prevent a sublime public property market crash in the future. It will happen when most of the flats in older estates reaches the end of their 99-year tenures. Contractually, a HDB flat will worth nothing at the end of the 99 years because the lease of agreement a buyer signed with HDB is a rental, not ownership agreement. Like any contracts, it can be transferred for a fee and rightly so. The problem lies in the general incorrect perspectives of the public of that we own our HDB flats and we are selling our flats, not the rights to lease it and that the government will arrangement for a SERS program to "extend" the owners back to a 99 year lease with another flat when their flat is old enough. These incorrect perspectives drove the prices of resale flats up, instead of down the older the flats go - where it should be. A HDB flat should be transacted by a simple formula of the:

True valuation = flat valuation (which will always go up yearly) x the age of the flat / 99

Singapore needs a radical change in our thinking on this matter. It is extremely painful but absolutely necessary and I say this even as a HDB owner myself. I don't think there is a better way than honesty. Any other formulation that conceal the actual situation serves only to worsen the circumstances when we will have to face them in eventuality. As a responsible government, they should stop encouraging creating the illusion of Singaporeans owning a property when they are merely granted a super-long rental agreement from the government and implement rules that calculates HDB flat pro-rated to their age. At least this will ensure HDB prices are sustainable enough so that our children of the next 2 generations can continue to ... rent.


  1. Bro, I think you valuation method is not quite correct. The Investment method should be used it is a DCF method used to arrive at a Capital Value. Notional rental income discounted until the end of term. Also the seller grants the buyer the option for a consideration (fee). The seller can only get liquidated damages and this cannot be a penalty, so if he suffers loss to less than the deposit he can't claim it all. It's year's since I learn't this so apologies if conditions have changed

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  3. They are not practicing free market as they preached if they kept changing the rules of the game.

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