The introduction of the new HDB resale rules has sparked much public discussion about pricing homes versus appraising them.
Last month, HDB moved its official valuation from before the Option-to-Purchase to after it.
National Development Minister Khaw Boon Wan said: "HDB will rationalise the process of price negotiations and restore the original intention of valuation, which is to help buyers get a housing loan.
"Negotiating based on price rather than COV (cash over valuation) will take some getting used to. However, it is a useful move for long-term market stability."
Since then, the public and industry professionals have continued to debate what this rule change means to the market.
What will replace the HDB valuation in the negotiating process? Will HDB valuations match the market price? How can one estimate cash outlay? What is the difference between pricing a property and appraising it?
This debate is taking place because the real-estate market, particularly in pricing, is fundamentally changing, thanks to technology and big data. The market's traditional and imperfect solution of using valuations to price homes is being replaced by a computer overlaid with professional human judgment.
Previously, the process of establishing a price in real estate has been opaque, especially when compared with other financial assets like stocks and bonds. In other words, there is no market clearing price that establishes an equilibrium price for similar properties.
Attempts to substitute valuations for market price are problematic for three reasons.
Firstly, valuation does not equal market price. A valuation is an expert's appraisal of the fundamental market value of a home, based on the best market data available.
Valuations cannot take into account the human element that impacts the final transacted price.
Only a negotiation between buyer and seller can factor in the human considerations that make it possible to agree on the transacted price, which then becomes the market price for the particular home.
Secondly, valuations cannot act as a market clearing price because they are non-standard in that two different appraisers can arrive at different valuations based on the same set of data.
Finally, the valuer may not have access to the best data available or have the capacity to process data from various sources without the use of technology.
Sam Baker is co-founder of the Singapore Real Estate Exchange (SRX), an information consortium formed by leading estate agency companies to share proprietary sales and rental data. For more property-related articles and opinion pieces by SRX, visit www.srx.com.sg
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This article was published on April 19 in The New Paper.
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