Contributed by John Tan

With the on-going Covid-19 pandemic where people lose their jobs, foreign tourists denied entry and gross domestic product (GDP) growth going south, the residential property market continues to remain soft.

I recalled some property gurus advocating getting 100% funding if there are anomalies between the selling price and the market value of the property. What do they actually mean by this and when does this happen?

As a property market observer, 2021 is arguably the best year for this scenario to happen. Mortgage banks typically require a valuation company to value all sub-sale properties to determine their market values. How does a property valuer value a residential property to determine its market value?

The typical method to value residential properties is the comparison method. There are several other valuation methods like the investment, residual, profit and cost methods but for residential properties, the most common method adopted is the comparison method. For this method, the valuer will cross-check with the actual recent transacted prices for similar properties nearby.

How it works

For example, to determine the market value of a service apartment unit, the valuer will cross-check for the most recent similar size unit that was sold in the same service apartment block. If the unit that is being valued is a 500 sq ft studio, the valuer will look for a similar size studio unit that was recently sold. The valuer will then input various adjustments for inflation, which depends on when the most recent unit was sold, its level and size (if the size is different). If no unit was sold in the block, then the valuer will use nearby service apartment units to determine the market value. 

As 2021 is arguably the softest year for the property market given the massive job losses, coupled with the overhang situation and lack of foreign buyers’ interest.

This translates to lower selling prices. But does the market price drop in tandem with the selling price?

In reality, there could be a lag of up to one year, before the lower prices are recorded officially and due to the time lag, the valuer is still cross-checking with last year’s prices which could be higher by as much as 30% than the actual prices being transacted currently.

What is the implication?

If the buyer still manages to get the bank to finance 70% of the market value when the actual cost of the property is 30% below the market value, then this translates to a no-money-down deal for the buyer. In other words, the market valuation is still higher than the selling price.  

Similarly, when the property market recovers in Q4 2022 and the selling price of the property increases, the valuer is still cross-checking transacted prices in 2021 which are 30% below the selling prices. 

To make it simple, assuming if the buyer is still able to gain a 100% loan, he will still have to cough up the 30% difference as the market value, which the loan is based on, is only 70% of the actual selling price.

In conclusion, the comparison method that valuers rely on to value properties (typically residential properties) suffer from a lagging effect. The lagging effect gives an avenue for investors to extract more equity from their properties during a downturn.  

Consequently, during an upturn (which is expected to take place end of 2022), investors may have to cough up more equity to buy in the sub-sale market as past transaction prices take time to incorporate the upward trend of SPA prices.  

Hence the market value will fall behind the selling price when the market recovers, causing investors to get lower bank valuation than their actual SPA price.

John Tan Joon Hooi works in the trade financing division of an international bank. As a commentator of the local property market, he encourages delayed gratification among young adults and views property investment as a good tool to preserve and grow wealth.