How property valuations quietly dictate Singapore's housing prices

I like to think of property valuation as a sort of fortune telling. 

Sometimes, I think property valuation is less like a science, and more like throwing a deck of tarot cards at a ceiling fan, and then reading whatever meaning you can into the pieces that fall closest to you.

Consider, for instance, the process of shopping for a mortgage. You'll notice that some banks value your property more, and others less. Some seem to do the process in-house, whereas others take the advice of third-party valuation firms (I know this because, the last time I tried to refinance, I was asked to pay the $700 fee to such a firm).

Property valuation isn't like physics, where there's consistency in the rules. There is, for instance, no reliable formula on how much more a unit is worth as you go up or down a floor; and there's no way to quantify, say, the value of a 3.2 metre ceiling height instead of the normal 2.6 metres.

Then there are projects where transactions are few and far between, like this one:

That's The Asana's price movement, according to Square Foot Research. There are individual transactions once every few years, so the price is more volatile than an Orchard Towers bar on Friday night.

Is that last price spike to be an accurate representation of value? Who knows?

Maybe the transaction just before it was some parent selling cheap to their own children, so it was sharply undervalued. Or maybe the most recent buyer is the sort who gargles with Bird's Nest in the morning, and is happy to overpay.

But the real mystery is: Who did the valuation, and how did they come up with that figure?

In lieu of a price history (which some might already consider a shaky approach), valuation comes down to some highly subjective elements. Even the companies who try to quantify everything (e.g., they have some sort of proprietary algorithm to figure it out) may not be able to explain why a certain number gets cranked out.

Still, I get why everyone's reluctant to be too open about it. No one pays for a valuation if the report starts with: "We sort of guess maybe $X," and no bank wants to say "We based the loan quantum on someone's guess, more or less."

That said, we all know that most of the time for the valuation it really comes down to the last few transacted prices at the development. If you get a few previous buyers who just so happened to pay higher cash amounts (so they never cared about the bank valuation anyway), it would mean that you suddenly get a higher valuation.

This can feel like a lot of nonsense, when you shop around for a home loan.

The part that I despise most, when it comes to getting a bank loan, is the valuation. You can try and argue for a higher valuation (so you can borrow more). You can also have your mortgage broker look for banks that will give you/accept a higher valuation. 

This is a problem, as it means that these valuations have an indirect effect on property prices. If certain banks are looking to push for higher mortgage targets for the month, you get higher property prices. 

And sometimes, it puts you in a bad spot. E.g., Bank A offers a package that's 3M SORA + 0.7 per cent, whereas Bank B offers a package that's 3M SORA + 0.9 per cent. But because Bank B is willing to accept a valuation that's $50,000 higher, you might just accept the higher rate and go with Bank B.

Given that home loans aren't well-differentiated (there's little difference besides the interest rate), accepting higher valuations is one of the few ways to attract borrowers, when a loan package is pricey. Quite often, I come across homeowners with terrible loan packages, whose reasoning is just: "They offered the highest valuation."

If you're looking for a mortgage, I'd seriously consider the extra interest you're paying, and your higher stamp duty rates*, before choosing based on the highest valuation. 

*Remember that stamp duties like BSD and ABSD are based on the higher of the selling price or valuation.

Elsewhere in Singapore's real estate scene, we're starting to see some collaborations.

UOL just teamed up with SingLand and CapitaLand to bid for a site in Tampines Avenue 11. This is for a mixed-use site, with a hefty $1.2 billion price tag. This is something we're likely to see more of, as rising land prices and development costs are making it harder for developers (even big ones) to go it solo. 

This also mitigates some of the risk to developers, such as paying the ABSD if they can't make the five-year time limit. If they didn't work together, we'd end up with much smaller - and likely pricier - condo projects.

This does cause one complication though: the new banding system by BCA rates developer quality, and we've yet to see what happens if, say, a lower-tier developer teams up with better-rated ones. Can a buyer make a reasonable assessment, without knowing how much involvement the lower-ranked developer has? 

Alternatively, it may increase the significance of BCA's banding to developers. 

This might happen if, for instance, better-ranked developers only team up with each other, and refuse to work with lower-tier firms. This could lock out some of the weaker developers from larger, prominent GLS sites. It would, however, incentivise developers to be serious about maintaining their rankings. 

Regardless, consortiums are going to happen, given the state of the market today - and we suspect it won't be long before most new condos bear the names of more than one developer. 

Weekly sales roundup (Aug 14 - Aug 20)

Top five most expensive new sales (by project)

Top five cheapest new sales (by project)

PROJECT NAME	PRICE S$	AREA (SQ FT)	$PSF	TENURE
THE MYST	$998,000	517	$1,932	99 yrs (2023)
LENTOR HILLS RESIDENCES	$1,139,000	484	$2,351	99 yrs (2022)
NORTH GAIA	$1,233,000	980	$1,259	99 yrs (2022)
PINETREE HILL	$1,285,000	538	$2,388	99 yrs (2022)
ORCHARD SOPHIA	$1,320,000	463	$2,852	FH

Top five most expensive resale

PROJECT NAME	PRICE S$	AREA (SQ FT)	$PSF	TENURE
SEASCAPE	$4,461,000	2174	$2,052	99 yrs (2007)
COSTA RHU	$3,900,000	2239	$1,742	99 yrs (1994)
MARINE VIEW MANSIONS	$3,825,000	2077	$1,841	FH
THE SEAFRONT ON MEYER	$3,780,000	1615	$2,341	FH
THE WINDSOR	$3,410,000	2454	$1,389	FH

Top five cheapest resale

PROJECT NAME	PRICE S$	AREA (SQ FT)	$PSF	TENURE
PARC ELEGANCE	$650,000	398	$1,632	FH
THE ALPS RESIDENCES	$685,000	463	$1,480	99 yrs (2015)
SOL ACRES	$700,000	495	$1,414	99 yrs (2014)
NOTTINGHILL SUITES	$705,000	398	$1,770	FH
NATURA@HILLVIEW	$710,000	452	$1,570	FH

Top five biggest winners

PROJECT NAME	PRICE S$	AREA (SQ FT)	$PSF	RETURNS	HOLDING PERIOD
THE WINDSOR	$3,410,000	2454	$1,389	$2,660,000	18 Years
MELROSE PARK	$3,300,000	1292	$2,555	$2,094,000	25 Years
MERA SPRINGS	$2,840,000	1550	$1,832	$1,783,000	17 Years
CENTRAL GREEN CONDOMINIUM	$2,380,000	1442	$1,650	$1,730,000	18 Years
SANCTUARY GREEN	$2,870,000	1711	$1,677	$1,570,000	23 Years

Top five biggest losers

PROJECT NAME	PRICE S$	AREA (SQ FT)	$PSF	RETURNS	HOLDING PERIOD
THE OCEANFRONT @ SENTOSA COVE	$3,000,000	1733	$1,731	-$730,000	16 Years
ROCHELLE AT NEWTON	$3,080,000	2164	$1,424	-$220,000	9 Years
THE ASANA	$1,500,000	635	$2,362	-$190,920	6 Years
DORSETT RESIDENCES	$1,430,000	689	$2,076	$44,000	13 Years
LINCOLN SUITES	$990,000	463	$2,139	$45,000	14 Years

Transaction breakdown

ALSO READ: Have HDB flats really gotten smaller over the years? Here's a look at the data

This article was first published in Stackedhomes.