Does Renting Beat Buying a Home?
Research says it may be cheaper to rent than to buy a home in Singapore, if residential property prices here continue their current moribund trend. But does this necessarily mean homebuyers here are better off switching to this option? And is property now necessarily the best place to park one's cash?
The rent-or-buy poser is often debated, even worldwide. In the United States, a study this year by Trulia found that home ownership is generally still 38 per cent 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 loan curbs (that is, the total debt servicing ratio, or TDSR) kicked in.
Square Foot Research has found that if prices stay flat, or appreciate anything less than 2 per cent over the next 4-5 years, renting could prove more cost-effective than buying a property.
Analyst Esther Hoon, from the independent property research firm, used the example of a buyer purchasing a condominium unit for S$1.28 million in Upper Bukit Timah (District 21). She assumed the buyer then sells the unit four years later - with four years being the minimum holding period to avoid paying seller stamp duties - at the same price.
Taking S$1.28 million and subtracting the mortgage paid, remaining loan, and initial downpayment and other miscellaneous fees, he would have made a loss of S$149,000.
On the other hand, Ms Hoon's research shows, if he had rented the same unit for a monthly S$2,800 for four years instead, he would have paid a total of S$134,000 in rental - less than the loss he would have made from selling his home.
Buying this unit would still be more expensive than renting it, if home prices appreciate one per cent in 4-5 years' time, her research shows.
But, the tipping point comes when prices increase 2 per cent or more; then, buying becomes cheaper.
For her research, the analyst used median rentals in Q3 2014 and median transacted prices in the secondary market from January-September 2014 for non-landed private homes (excluding bulk sales), on properties ranging from 1,000 to 1,200 sq ft.
She assumed that the property loan was borrowed at a fixed interest rate of 2.18 per cent over 30 years, and the rental was fixed over a 48-month holding period. She did not take into account inflation and discount rate.
So, 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. After all, they do build up equity as they pay down a mortgage, said R'ST Research director Ong Kah Seng.
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", Mr Ong says.
Singapore's housing policies are also more geared towards home ownership than leasing. Central Provident Fund (CPF) savings, for instance, are a powerful tool that helps locals to buy properties. CPF Ordinary Account savings can be used to pay for the downpayment as well as monthly loan instalments.
"Many people are unsure how best to make use of their CPF monies during the interim years, but if they invest in a flat or private property, they will be on a sure path to capital appreciation in the long term," Mr Ong said.
As for deep-pocketed foreigners looking for a safe haven to park their cash, the absence of a capital gains tax in Singapore continues to provide them an incentive to buy.
But beyond the rent-or-buy options, is there a third alternative investment for one's cash? Or, put another way, what is the opportunity cost of the equity or capital tied up in a home purchase here?
DTZ's Southeast Asia regional head of research Lee Lay Keng points out that home prices have outpaced equities. She calculated that private home prices have grown 6.1 per cent between post-crisis Q3 2009 and Q3 2014 on a compound annual growth rate basis - faster than the Straits Times Index's growth of 4.2 per cent between September 2009 and September 2014.
That said, the performance of the various asset classes can change a lot, year to year. From Q3 2013 to Q3 2014, private home prices fell 3.3 per cent. In contrast, even though the equity market has been sluggish in that same period, blue chips appreciated 1.23 per cent year-on-year as at end-October.