In a blog post on his website TanMengWah.com back in September 2019, Progress Singapore Party’s (PSP) Dr Tan Meng Wah outlined in detail his party’s long term solution to the high housing costs in the country that was one of the major talking points in the recent GE2020.
The article, which was reproduced on Saturday (25 July) on PSP’s Chua Chu Kang GRC Facebook page, details how the “deferred land cost” approach would work and compared it to the current pricing system employed by the government where the price of land of a Build-to-Order (BTO) Housing Development Board (HDB) flat is included in the total price of the flat at the outset.
Dr Tan noted that this alternative approach would achieve the “seemingly conflicting” objective of promoting home ownership without draining the country’s fiscal resources, preventing wealth transfer from households to the State which would protect people’s CPF retirement funds, allow households to enjoy the bonus of capital gains if the flat is resold while allowing the state to still collect land costs, though at a later stage.
Home owners won’t be penalised for goverment’s ‘misguided optimism’
The deferred land cost approached would defer the government’s collection of land cost at the point of a BTO sale until the homeowners decide to resell the property. This means that the government will still collect the land cost to build up the nation’s reserves but the money would come from proceeds of the resale and not from the homeowners CPF as it currently does.
In the event that the resale value of the flat does not cover the original land cost, the government will bear that cost.
Mr Tan explained, “In this way, if the government makes an overly optimistic projection on land costs at the point of BTO sale but cannot fully recover it at the point of resale, the households will not be penalized by the government’s misguided optimism.”
He went on to say that with the land cost being deferred, buyers can make a smaller down payment and take out a smaller HDB loan, meaning smaller monthly mortgage payments and a shorter loan repayment term which in turn means lower interest payments.
“The shorter loan term also means that homeowners can clear two housing loans possibly even before they hit 50 years old, assuming they buy two new BTO flats during their lifetime. This greatly reduces households’ financial risks,” added Dr Tan.
He noted that this approach “works on the principle that public housing is first and foremost a consumption good and a homeowner pays only the costs of consuming it.”
He went on to highlight that if a homeowner decides to sell the property, it then becomes an investment asset. Anything gained from the sale of that property which sits on government land must “rightly be shared with the state” which has provided the land and developed it.
Dr Tan argued that with this deferred land cost approach, homeowners “get the best of both worlds” as there is a limited risk to them in buying public housing while still being able to enjoy a potential gain should they choose to sell.
Deferred land cost vs Current pricing approach
To illustrate how this approach compared to the current pricing model, Dr Tan used the example of a four-room BTO flat priced at S$562,000 in a matured estate. Assuming that the land cost of 50% of the BTO price, that means the buyer would eventually pay S$128,000 in interest over a 25-year loan period under the current model.
That means the buyer would pay out a total of S$781,000 for the BTO. From that, S$500,000 would go to the government for the land, interest, and resale levy—all this is profit to the government.
In contrast, deferring the payment of the land cost in the above example would mean that the buyer will only pay S$281,000 for the construction of the BTO property. The much lower amount means they can take a smaller housing loan and repay it within a shorter period of time—for example, 15 years—and a lower monthly mortgage.
According to Dr Tan’s calculations, this means the buyer would pay a total of S$334,000 where only S$53,000 out of that is interest. This immediately saves the buyer S$129,000 that won’t be coming out of their CPF account. All that money that stays in the CPF account will also earn interests overtime, meaning that the buyer would have up to S$448,000 more in his CPF account under the proposed approach compared to the current approach.
Additionally, the buyer would also potentially have more should they decide to put the property up for resale and make more than the land cost that they have to pay the government at this point.
Continuing with the example, Dr Tan suggested that if the BTO flat appreciated by 30% from the original price paid, the current approach would result in a loss for the homeowner as he would only make about S$730,000 despite having to pay S$781,000 (BTO price + interest).
In comparison, with the deferred land cost approach, the homeowner would make a net profit of about S$116,000 even after paying the deferred land cost to the government. The lower interest rate creates room for capital gain, says Dr Tan.
On this capital gain, Dr Tan suggests: “The capital gain can be credited to a special ‘Nation building Bonus’ CPF account in recognition for the homeowner’s contributions to nation building.”
He added that if the homeowner decides to migrate, the bonus “can be seized by the state as a punitive measure.”
“Alternatively, the capital gain can be shared with the State based on a pre-defined formula,” he continued.
Under this proposed approach, Dr Tan emphasised, “Both HDB and CPF will revert to doing what they were first created to do: providing genuinely affordable and high quality public housing and helping households to save for their retirement.”
‘Genuinely affordable’ housing could raise total fertility rate
Finally, Dr Tan elaborated on how this deferred land cost approach could raise the total fertility rate (TFR), which has been a concern in Singapore for years now. The country’s TFR has been dropping steadily since 1988 and currently stands at 1.14.
Dr Tan argued that with HDB flats made “genuinely affordable” under this approach, couples might choose to opt for bigger flats at every new sales launch. A solution to this, he suggested, is to link the size of the flats to the number of children in the household.
He argued that the government is already doing something similar now as it links the size of the flat to the size of the household where single people are only allowed to buy 2-room flats.
“This policy of promoting family as a basic unit can be extended so that bigger apartments are reserved only for families with children,” he asserted.
He continued, “With that restriction in place, the likely scenario will see young childless couples in their 20s starting with a 3-room apartment. They then sell and upgrade to a 4 room or 5-room flat when they are in their 30s depending on the number of children they have at that point.”
“The housing loan for the second BTO flat will be fully repaid by the time they are in their 50s. They can stay in the second flat after their retirement or downgrade to a smaller flexi-lease apartment if they choose to.”
Dr Tan added that if if a couple wants a bigger house than they are entitled to, they can purchase one on the resale market—from which the government will recover land costs—which he says will help create demand and price support for the HDB resale market.
“Hopefully, by not punishing couples for having more children, the restriction may over time lead to higher TFR,” he added.
Dr Tan concluded, “Over the past few decades, Singapore’s demographic dividend contributed immensely to the growth of not only the economy (income generation) but also land dividend (wealth generation). With the proposed pricing model, the process can now be reversed so that land dividend can be used to replenish Singapore’s demographic dividend for a more sustainable future.”