THE key question on the price escalation of resale Housing Board flats is why prices are rising so rapidly, especially in prime locations.

The problem lies in the process by which valuation chases after cash over valuation (COV).

For example, a three-room flat in a good location may be valued at $200,000. But if buyers are willing to pay COV of $50,000, pushing the trans-action price to $250,000, the valuation of the same flat will spike correspondingly in the next round, and the process is repeated, leading to the current unhealthy spiral.

Generally, buyers do not care about valuation because it is beyond their control. They know that 80 per cent of the loan can be taken based on valuation and are generally prepared to fork out between $50,000 and $100,000 for a good location.

One way to break the vicious circle of valuations chasing after COVs and better regulate resale prices is to base a typical flat's valuation price on the average price for the the whole of Singapore.

For example, the valuation of a three-room flat can be based on the average of all three-room flats.

This would make buyers rethink whether they are willing or able to afford COVs of $100,000 on top of such a stiff valuation.

Then resale prices would be unlikely to rise so rapidly.

Daniel Choy

This article was first published in The Straits Times.