PSP's Affordable Homes Scheme is 'prepaid rental scheme' that will erode reserves: Indranee Rajah

PSP's Leong Mun Wai spoke of a need to reset public housing policy.

Lean Jinghui| February 08, 2023, 08:42 PM

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Second Minister for National Development Indranee Rajah said in Parliament on Feb. 7 that the "Affordable Homes Scheme" proposed by the Progress Singapore Party (PSP) is, in essence, a "national prepaid rental scheme" with "an option to buy".

This is because those who buy new BTO flats would no longer be home owners, but rather, renters of the flats instead.

She said that the alternative policy proposal will not "safeguard the interests of current or future generations", but rather, "erode" national reserves. Indranee added that aside from being "inequitable" as it benefits one user at the expense of others, it is also "poor policy" with implications for the broader housing market.

What is the "Affordable Homes Scheme"?

But first, what is the "Affordable Homes Scheme"?

For those who might have missed the marathon housing debate on Feb. 6 and 7, the policy was proposed as part of a motion tabled by PSP's Leong Mun Wai. You can read his full speech here.

Under the "Affordable Homes Scheme", an individual would be able to buy a new BTO flat at a "user price" that excludes the individual from having to pay for land cost at the point of purchase.

The price of the BTO flat would be based on “construction cost and a notional location premium” instead.

The land cost would only be paid, along with some "accrued interest", if the individual were to later sell the BTO flat in the resale market – after completing the Minimum Occupation Period (MOP).

A proposal "too good to be true"

In her speech, Indranee noted that the PSP had not mentioned how the "notional location premium" would be determined, and that the PSP's portrayal of "cheap housing with no downsides" sounded "too good to be true".

She said, "no matter which way you look at it, PSP’s proposal involves selling state land cheaply".

However, "land has value", which means that someone else would still be bearing the cost of land should an individual choose to stay in the BTO he bought for the entire duration.

Indranee shares:

"What Mr Leong has not told you is – you all are paying for it. The cost is borne by all other Singaporeans – each of us in this generation, as well as our children and grandchildren."

If the fair value of the land is not accounted for or is given away for free, this will also eventually shrink Singapore's reserves each time land is used for public housing.

Over time, there will then be less resources available for crises and other public expenditures, and taxes might need to be raised more quickly to get more revenue to "make up for what the NIRC cannot fund".

How the reserves work

Previously, Indranee had explained in a response in Nov. 2022 that the sale of state land does not result in a net increase to government reserves, but rather that the physical asset is converted to its equivalent as a financial asset.

The financial asset is then reinvested, with 50 per cent of the investment returns supplementing the national budget annually.

This amount is also known as the Net Investment Returns Contribution, or NIRC, and "strikes a balance" between the needs of current and future generations of Singaporeans.

Under the PSP model, that mode of investment and income from the sales proceeds will no longer happen.

In the debate on Feb. 7, Indranee said: "Despite Mr Leong’s claims that he is not raiding the reserves, his proposal does exactly that. Those who choose not to sell their flats will enjoy a large subsidy at everyone else’s expense. On the other hand, those who choose to sell their HDB flats will have to pay recorded land cost and accrued interest, but "with no subsidies or grants".

Addressing Singapore's one million existing homeowners, she adds: "Please consider what this might mean to your property value. Also consider, is it fair that by policy design somebody else gets the same flat as you but at a much cheaper price?"

Implications for the broader housing market

PSP's model of deferring land cost until resale may also make some homebuyers worse off, in part by dampening their "net proceeds" upon resale, but also by possibly driving up demand for new BTO flats, Indranee said.

Indranee said that with "much cheaper flats (paid for by everybody else)", many people will join the queue for a BTO, and that with increased competition, BTO waiting times would likely become longer, resulting in "greater uncertainty". There is then a "real risk" of destabilising the resale and property market.

She questioned:

"[So] the overall scheme is rental with an option to buy. At the point of disposition, when the user gets it [the BTO flat] from HDB, does the user [then] get legal title or just the right to occupy?

If it is just the right to occupy, then the person is not the owner [...] In short, you only own when you sell. Whereas under our current [HDB] scheme, you are an owner from the time that you buy the flat."

Leong Mun Wai: PSP's scheme will make it fairer for the next generation

In his closing speech, Leong said that PSP's proposal gives the present generation "a leg up" to do better, while giving future generations the "best inheritance". You can read his entire closing speech here.

He also said that the scheme is fair to the next generation because "not all the land cost would be lost". Leong said:

"In fact the 'Affordable Homes Scheme' will make it fairer for future generations who can enjoy HDB flats at the user price, rather than the higher BTO price in the future. This is the most consistent and fair treatment for every Singaporean in each generation."

He also clarified that PSP has always kept in mind the idea of taking land cost out of the picture, and explained that PSP believes that land costs should not be charged for owner-occupied flats because it is a "public good" with social benefits to be shared by society.

Leong added that he believes that the cost of the "policy reset" can be managed under budget resources when and where needed, without needing to dip into additional reserves.

He concluded:

"The Government’s appreciating asset narrative for the HDB flat has become untenable, as more than 50 per cent per cent of HDB flats will be over 50 years old by 2030.

It is counterintuitive also to believe that a system that relies on rising HDB prices can deliver affordability.”

Other stories related to the housing debate from Parliament:

Top screenshots via MCI Singapore YouTube