Valuer for HDB units, an easy job?

After years of painful search and watching the property prices continue to defy recession forces, a friend of mine finally settle for flat in a mature estate with about $50k above (already high) valuation. Querying the valuation of the flat, I discovered it is valued at the higher tail end amongst recent HDB resale transaction. And yet my friend is paying $50k above this.

HDB valuation methodology

I came across a recent article to the Straits Times forum from the Singapore Institute of Surveyors and Valuers commenting on HDB valuation:

...
For homogeneous properties such as HDB flats, the common valuation method adopted is the direct comparison approach. This approach is similar to that used by a potential buyer when considering the purchase of a flat. He would look at the location, consider the age, size, design, height and other important characteristics of the flat and compare the prices paid for comparable flats in the locality.
...

src: Straits Times Forum: HDB flats: No new valuation method

However, it seems to me the valuer simply value the flat based on recent transaction, pegging to the sales in the higher percentile.

Valuer and Stock Analyst

I commented on market-biased analyst before in my earlier article, Analyst's analysis --- to be taken with a tonne of salt? that many simply value stocks based on market sentiment, i.e. using high P/E ratio to derive stock valuations during market exuberance and conversely using low P/E ratio when sentiments were poor. Valuing HDB properties by tagging on to the high end of recent transacted prices is no different.

Boom Bust Cycle - here we go again

Sentiments in the property market is definitely pointing north. By valuing flats based on the higher percentile of recent transactions and willing buyers paying hefty cash over value over the inflated valuations to form the next higher transaction price, only lead to self-sustaining perpetual runaway valuations. The stock market parallel being investors bidding up stock prices fueling analysts to issue buy calls with even higher valuations by finding means to justify higher P/E ratios.

The Tipping Point

Any sane investor who lived long enough will know that surging prices will not reach the moon one day. Many events, usually unexpected, could put an end to all such craze and caught many by surprise even if there will be more 'experts' coming out to warn people as prices continue to defy gravity. The direct opposite will occur when prices tumble as all tried to exit the market at the same time. Stock analysts will slap stocks with ever lower P/E ratios as market sentiments continue to worsen. When sellers of HDB flats begin to sell below valuations that they finally agree to be over inflated, this leads to lower transaction prices and hence even lower valuations for other sellers.

Conclusion

While price surging and plunging in accordance to economic cycles is a natural phenomenon, the amplitude can be better managed if all valuers (analyst and property valuers) can be more impartial in their analysis, anchoring their judgment on solid fundamentals instead of ambient sentiments. Buyers (flats or stocks) need to do their part too, in not outbidding each another to ridiculous prices.