The Impact of Valuation on House Prices: A Case Study of Singapore Housing Market

In recent years, it has become a usual practice for buyers of public housing in Singapore resale market to fork out additional cash upfront to sellers to sweeten the deal. This additional cash premium, also known as cash-over-valuation, ranges from 10-20% of the valuation of the property. The amount of cash-over-valuation paid in the secondary market has been consistently high, despite Government intervention to soften the market. This phenomenon has generated concerns among the public on housing affordability and the valuation methodology adopted. Even though it is reasonable for transacted price of the property to vary ±15% from the valuation in appraisal report, it seems puzzling to observe the variation to be persistently positive. What makes it even more puzzling is that both buyers and sellers know the valuation of the house before the transaction is completed. Given that the objective of the appraisal report is to reflect the true value of the house, we expect the rational buyers and sellers to set their agreed price near the valuation reported. We suspect that buyers and sellers use the appraisal report as a source of information on the supply of units of similar attribute to derive their bargaining power. In this paper, we attempt to find out the determinants of the cash-over-valuation. As we do not have valuation data on the appraisal reports, we derive the valuation using the Hedonic Regression approach to proxy the sales comparison approach. As the cash-over-valuations for each district are published for some years, we use them to corroborate our valuation. After controlling for possible market exuberance and anchoring behavior, we found preliminary evidence that the valuation reports serve to inform the scarcity of property and determine the bargaining strength of seller.