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Saturday, 20 March 2010

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.


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.

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Anonymous Best Trading Strategy said...

It seems like valuer simply charge the flat based on modern transaction, hooking to the sales in the higher percentile.

20 March 2010 at 14:15  
Anonymous Anonymous said...

When something is though to be scarce and buyer attach a very high emotional value to it, run away market will be formed.

This is part of willing buyer willing seller.

Who can stop such forces?

21 March 2010 at 10:06  
Blogger la papillion said...


How true. This is just pure rubbish when you mention it - valuing a flat based on how others value it.

But is that a better method to do so? Any suggestions?

23 March 2010 at 09:58  
Blogger Market Uncle said...

Valuation of near identical stuff (e.g mass produced electronics) is easy and fair, both command equal value if produced together.

Valuation of unique items is almost impossible (e.g paintings) and its entirely based on willing buyer, willing seller.

We are dealing with HDB flats here, not individual bungalows in different parts of the island with different view or elevation. A unit should not vary too much from the next in the same block, especially when the renovation are almost never taken into account.

So a transparent forumula to value a flat should be set, e.g.

value = f(location, level, view, amendities, age, average last done prices etc).

It will not be easy to come up with the forumula, but at least valuation won't be as simple as calling the highest of amongst the last transacted price.

23 March 2010 at 22:34  
Blogger Market Uncle said...

Willing buyer and willing seller is ok for a free market. But when the market is regulated and bank loans depend on the valuation, then its becomes fools' gold... don't be the last person to catch it.

23 March 2010 at 22:35  
Anonymous Anonymous said...

Bank usually give loan based on their internal valuation.

24 March 2010 at 22:16  
Anonymous ff said...

Supply and demand.

When it is regulated, then it becomes even harder to determine what the "true" value is.

10 April 2010 at 14:18  
Anonymous Glare said...

HI Market Uncle, me again. Well i'm looking for a 3room resale HDB now mostly at yishun area.

The COV is ranging from 25k - 40k...

I'm wondering whether should i buy it now or see the situation first until next year. Because heard of the change of loan interest rate by end of this year and rumors say next year most probably property market may crash..

Need your advise on this whether i should buy now or wait til next year because I need to give lots of hard earn cash for the COV which i feel it's unreasonable...and too much.

16 April 2010 at 22:33  
Blogger Market Uncle said...

Hi Glare,
There's no way we can predict or time the market as too many factors (both logical and irrational) affect prices.

I can't really advice you on this, but for myself, a property is just a roof over my head and I'll prefer one I am comfortable staying for decades (no complains if I can't or do not want to move) and can comfortably pay off.

So do consider seriously before committing. Good luck for you house hunting :)

19 April 2010 at 12:21  
Anonymous Anonymous said...

Walking away from a bad deal is something all of us should learn.

19 April 2010 at 13:52  
Blogger Glare said...

Hi Mr.Market Uncle and Anonymous,

Thanks for the advice. Appreciated.

:) Hope I manage to find a good place that within my budget.

19 April 2010 at 20:14  

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