Buy or rent? That is the question on every potential homebuyer’s mind

The perennial rent vs buy argument has no simple answer. One way of looking at this question is to ask yourself whether you can afford to buy a home. Property that costs a million dollars would require you to put up about S$250,000 as an initial contribution. Can you afford this?

Taking a “buy” decision also means that you will see a large part of your monthly income going towards repaying your mortgage. This will go on for the next 25 years or more. In other words, you will have to live with your home loan repayments for practically your entire working life.

It is highly inadvisable to take a decision about buying a home without first thinking through all the implications.

 

In certain situations, renting is the best option

Buying a home restricts you to a certain location. It also means that you are committing yourself to a house of a certain size for the foreseeable future.

A newly married couple who opts to buy a home instead of renting it must remember that over the years, their needs may change.

• When the couple has children, they may need a bigger house.

• The couple may want to move to a location that is closer to one of their parents’ home.  

• If the house is not located near the school where the couple would like to place their children, they may not be considered for admission there.

In fact, there could be many reasons for moving to a different location. Of course, it is possible to sell your house and buy a larger home. But the costs and the inconvenience may be a major deterrent. You may decide to simply stay put and manage as best as you can.

 

Renting is definitely cheaper

You simply cannot afford to ignore the importance of the financial implications of the rent vs buy question. How much will a resale HDB flat cost? According to government data, you can expect to pay a minimum of about S$400,000 for a 5 room house. A flat in a good location could cost twice as much.

Let’s say that you decide to buy a house valued at S$600,000. Your 25% contribution will work out to S$150,000. Compare this to the rent that you will be required to pay. The monthly rent for a house valued in the range of S$400,000 to S$600,000 will be significantly less than S$2,000.

Renting provides other advantages as well. For the last four years, rents in Singapore have followed a downward trend. The rental index of private residential properties published by the Urban Redevelopment Authority touched a level of 103.6 at the end of the first quarter of 2017. It has been in a state of consistent decline since mid-2013 when it peaked at a level of about 118.

 

Source: Urban Redevelopment Authority

 

If rents continue to fall, you can expect to save some money with each lease renewal.

 

Buying helps you build wealth

Having considered, the advantages of renting a house, let us now consider the merits of buying one.

There are several significant benefits that come with home ownership. If you look at only the financial aspect, buying your own home could be a very wise move on your part.

When comparing a home purchase with renting a home, consider the purpose to which your monthly outgoings are being put to. The rent you pay is not giving you any benefit except the right to stay in the house for a certain period. But your mortgage payments, on the other hand, are helping you build long-term wealth. Your home will probably be the most valuable asset that you will ever own.

Think about it. Month after month, year after year, possibly for three decades or even more, you will be paying rent. After paying hundreds of thousands of dollars over this period, what will you have to show for it?

If you look at the rent vs buy question in this manner, it makes much more sense to buy a home. Yes, collecting the initial amount may be difficult. Making a mortgage payment of several thousand dollars every month may crimp your lifestyle. But owning your home will be worth all the trouble that you have taken.

 

Other advantages of buying a home

A home that you own gives you a sense of stability and security. Living in a rented house can be inconvenient. Every time the lease expires, it will be necessary to negotiate a renewal. You may have to shift to another flat if the landlord wants the apartment back.

You could also be faced with a situation where the same type of flat is available in the neighbourhood at a cheaper rental. You could be tempted to shift despite the trouble and bother that this will cause.

If you live in your own home, you won’t face these issues. In fact, there is a reasonable probability that in the long-run, your investment in real estate will appreciate in value. A report in the Financial Times points out that property prices in Singapore rose by 62% in the period from 2009 to 2013.

Although prices have been in decline since then, it is highly probable that the trend could change direction in the future. The value of your home could register a sharp increase in value.

 

Rent or buy – which is better?

It is impossible to provide a generalised answer to the rent vs buy question. Every individual’s situation is different and you would have to take a decision after factoring in the conditions that apply to you.

But conventional wisdom says that buying is always better. If you own your own home, you will not have to worry about paying rent in your retirement years. If you are short of money, you can always sell your house and move to a smaller flat or a lower-priced unit. The excess amount can be used for your household expenses.

If you are convinced that buying is a better option, it is advisable to make a purchase as early as possible. A twenty-year-old can opt for a 30-year mortgage. This will result in a relatively low monthly repayment amount. If you decide to buy a home when you are in your 40s, the mortgage payments would be spread over fewer years and would be much higher.

Deferring the decision to buy a home may not be wise. After a certain age, the monthly repayment amount may become unaffordable and buying may not remain an option at all.

 

(By Ravinder Kapur)

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