Better to rent than buy?

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In a country like Singapore, where home-ownership is almost a national imperative, the question of buying versus renting can seem rather strange. Isn’t owning always better than buying, one may ask? The answer, perhaps counterintuitively, might be, not necessarily so, especially if we were to look at the private residential market.

Homeownership is an extremely expensive enterprise, not least of all in Singapore, one of the priciest markets for real estate in the world. Furthermore, with the prospect of mortgage interest rates rising, homeownership costs will definitely rise.

Running numbers

Let’s run two separate scenarios for the private property market in Singapore to examine if it is better to rent or to buy the same piece of property. To provide an accurate comparison, we will assume that this property is about 1000 square feet, in the city fringe area, and is already move-in ready, and that the total rental or living period is four years.

Scenario one: Renting

The median rental in a city fringe district like District 15, as at the end of Q3 this year, was about $3.30 per square foot per month. This would suggest that the starting rental for a 1000 square foot unit would be around $3,300. Figure 1 below works out what the total rent would be over four years, based on an assumed five percent increase of the rental price per year.

In this case, over a period of four years, the tenant would have paid a total of $170,681. This figure does not include other costs of tenancy, such as utilities, the security deposit,

Scenario two: Buying

Generally, new-ish units in the city fringes are going for about $1,700 per square foot. Applying this to our hypothetical condo unit, we would end up with a buying price of $1.7M. If we assume that the homebuyer gets a loan with a 30-year tenure, the mortgage amount is $1.36M.

First year costs, not including the monthly mortgage, would include a downpayment of $340,000, and a buyer’s stamp duty (BSD) of $45,600. This works out to $385,000.

The monthly mortgage payments, based on differing interest rates, are given in Figure 2, and are calculated using PropertyGuru’s Mortgage Calculator. If we were to go with the lowest interest rate, the total outlay from the first year alone would be $446,280.

Since this is a private residential unit, we also added in an annual maintenance charge of $6,000, based on an estimated monthly maintenance fee of $500.

After four years, the total costs of ownership, would work out to be about $630,120. At this point of time, the remaining loan principal stands at around $1,205,666. If the homeowner were to sell at this point of time, s / he would need to set a price of about $1.84M, in order to break even. This is purely based on the numbers worked out here alone, and do not include option fees, renovation costs, agent’s commissions, bank administrative fees etc.

For the homeowner to cover costs, they would need to have their property appreciate by about eight percent over the four years, or a compounded annual growth rate of about 2 percent. However, one should note that if the homeowner only managed to cover costs, they would still have to pay for the downpayment for their next home entirely out of pocket.

Breaking it down

What this implies hence, is that if the annual growth in value of the home were to be less than two percent per year, or if interest rates were to rise, the homeowner might have been better off renting, because of the money that was lost. Due to the prices of homes in Singapore, homeowners would need to commit to the long term, rather than staying and flipping in the medium term.

At the same time, there is also an opportunity cost to the money that is used to pay off the downpayment, and the monthly mortgage. Homebuyers, or at least the ones who are looking at homebuying as an investment, need to ask themselves what other ventures could they have used their money to reap similar returns.

It therefore is a matter of timing for homebuyers. Timing the market well – buying when the market is low and selling when the market peaks – is a definite way of making sure that one reaps returns. However, this is contingent on the homeowner having adequate holding power. Selling while the market is still in the doldrums, or exposing oneself to sellers stamp duties by letting go before four years would adversely affect the returns on investment one would expect.

Beyond the numbers

Homeownership however is more than purely numbers. There are very strong psychological and cultural factors that drive individuals and families into buying a home, rather than renting. These could include the idea of having a place to call one’s own to raise a family, or having an asset to pass down to future generations. The shorter to medium term returns might therefore not be such a strong argument for many.

However, renting is not without its benefits, and is in many countries, a common system where many find their homes to live. Renting provides opportunities for more frequent change, a larger degree of disposable income with which to enjoy life, and less obligations.

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