The Business Times ran a rather interesting article today about renting versus buying.
A study this year by Trulia in the
United States found that home ownership is generally still 38% cheaper than
renting. Meanwhile, the Reserve Bank of Australia said it could become cheaper
to rent instead, with home prices unlikely to keep growing at the rate they
have over the past 60 years.
In Singapore, home prices have fallen faster than rentals since
the TDSR kicked in. A research by Square Foot Research has found that if prices
stay flat, or appreciate anything less than 2% over the next 4 – 5 years,
renting could prove more cost-effective than buying a property.
To illustrate the point, they used the example of a buyer who purchased a condo unit for $1.28
million in Upper Bukit Timah (District 21) and then sells the unit
four years later – with four years being the minimum holding period to avoid
paying seller stamp duty – at the same price. Taking the $1.28 million and
subtracting the mortgage paid, remaining loan and initial downpayment and other
miscellaneous fees, he would have made a loss of $149,000.
On the other hand, the research shows that if he had rented
the same unit for a monthly $2,800 for four years instead, he would have paid a
total of $134,000 in rental – less than the loss he would have made from
selling his home.
The research also showed that buying the unit would still be
more expensive than renting it, if home prices appreciate 1% in 4 – 5 years’
time.
But the tipping point comes when prices increase 2% or more –
buying becomes cheaper then.
So given the current falling market prices, which is widely expected to worsen next year, does this mean homebuyers here should switch over to
renting instead?
Singapore, along with some other Asian countries, may be
unique in that renting rarely comes across as an option for locals who can
afford to buy – even if they bemoan the high cost. Their motivations go beyond
mere profit-and-loss calculations, extending also to personal and psychological
concerns – financial security or pride, for instance.
Property prices also generally do appreciate in the long
term, while rental money essentially goes nowhere, neither bringing one closer
to owning a home nor yielding one any returns. It is merely “helping your
landlord to pay his monthly mortgage”.
Singapore’s housing policies are also more geared towards
home ownership than leasing. CPF savings, for instance, are a powerful tool
that helps locals to buy properties.
The wife and I were discussing about the above report while on our way
to Jakarta this morning, and we have come to the following conclusions:
1. The amount of savings that one is able to
derive from renting versus buying is largely a function of the price quantum and expectation of how much the market will fall. Using an example of a $2
million dollar property and if one thinks that prices will drop by 10% in a
year, you can easily rent a more-than-decent apartment these days for $6K a month
and still save in excess of $100K if you defer the purchase till next year.
However, if the property that one is looking to buy is in the $1 million range,
and assuming a price decline of only 5% in a year’s time, the resultant saving
is only $20K even if one decides that he can make do with renting a lesser
apartment at $2.5K a month meantime.
So the question becomes: whether the actual
savings is the worth the possible “opportunity costs”, which other than
personal and psychological concerns, may also include timing, i.e. whether you
can find the exact apartment that you wish to buy at that later point in time,
which is especially so when comes to resale properties.
2. Although we may talk about a one year period of “rental
then buy” versus “buy now”, this is also dependent on how soon one can find and
purchase the “right” apartment and how long more before he can actually move
it. As we have mentioned in our point #1, the process of finding the “right” apartment especially with
resale properties is a matter of timing and also luck. So when one
may be ready to buy, he may not be able to find anything that he likes at that point in time. Or he may be faced with more severe competition for that same unit because more people who had decided to enter the market then.
And even if he manages to secure the unit, there is also the question of the
time needed for legal completion and then renovation (the more extensive, the
longer the time before one can move in).
So effectively speaking, the wife and I reckon that for
anyone who wants to wait a year by renting meantime, the effective rental
period will more likely stretch to at least 18 months before he can move into
his new (purchased) home. So one ought to take into account the extended rental
period when doing their profit-and-loss consideration.
What do you think? The wife and I really hope to hear some of your viewpoints as it has been awfully quiet on the "comment" front lately... so much so that we are beginning to wonder if there is actually anyone out there?! 

might also be worth thinking about more in terms of range of outcomes as well.
ReplyDeleterental expense is relatively fixed and it is clear what the "loss" is
gain/loss in capital value when you buy is magnified with leverage
it is a lifestyle choice as well
ownership means you can renovate house to suit lifestyle
renting limits the options
what is the value of living in a house that you can call home?
i have read your blog since 2010 and is one of the first time waiting to buy, buyer. at the time when i read your blog, i don't have the means to buy. but now I'm equip with funds and is looking to buy. though report shows price are falling etc etc, but in actual fact it is still quite exp. don't u think?
ReplyDeleteHi Anonymous (12/11/2014, 2:50pm): First off, thank you very much for supporting our blog over the past 4 years!
ReplyDeleteThe wife and I are glad that you are finally in the market for your first home. While it is true that prices are still on the high side currently, resale prices have already dropped by about 5%. Even with new projects, developers are beginning to soften their stands on prices.
However, there is a good chance that prices will ease even further next year as a deluge of new units are expected to come on-stream. And depending on who you ask, the magnitude of price decline can be anywhere between 10 - 20%.
Having said that, the wife and I believe that there are still quite a bit of "pent up demand" within the market, i.e. people with the means to buy but just waiting for the market to soften even more before they enter. How this will affect the actual dynamics between demand and prices will be interesting to watch.
Hope the above helps and good luck on your search!
Thank you! :-) In case there's too many anonymous, i will leave a name for easy identification next time!
DeleteHi "Folks" ,
ReplyDeleteLet me make some noise as per request.
Current condo prices still on the high side even with those "barriers".
Eg, a 2004 unit , 3 bedder , 128 sqm Yishun area 99 yrs going for ard $765 psf
When new , ard $450 psf. 12 yrs on , appreciated by 40%.
Frankly , if it's 20% profit ,I can accept it as a capital appreciation.
As we know new development prices are going down, so can take time to hunt for Good Buy.
Thank You.
10 years ago grad starting pay 2plus K, now 3plus K, how many percent increase?
ReplyDelete