Cash premiums indicate real value of flats

I REFER to last Saturday’s report, ‘Cash premiums for HDB flats hit a high’.

Why is there so much focus on premium over valuation when valuations by property agencies have no fundamental basis?

Such valuations are based simply on comparable recent transactions and are virtually meaningless to the long-term buyer.

For example, in the landed housing segment, valuations were severely depressed during the economic downturn from November 2008 until March last year, and property agencies used valuations based on transactions of similar properties.

So, if a desperate seller needed to sell his property at virtually any price (which was the only price available at that time), that absurdly became the ‘valuation’ for the next seller.

Many so-called valuations were even less than government land auction prices 12 to 15 years ago, even though the replacement cost of these properties was far higher.

Ultimately, the fundamental value of properties depends on future rental yields, replacement cost of the property and more subjective ‘growth catalysts’ such as higher incomes and population, and new developments.

Based on these factors, the public market valuation reflected in cash premiums is a more reliable indicator than superficial valuations by property agencies, which is nothing more than a fee generator for them.

Bobby Jayaraman

Source : Straits Times – 29 Jan 2010