Renting or buying: is one really better than the other?

Traditional wisdom considers property ownership to be the best form of investment. Living in your own home gives you a sense of security and belonging. If you go through a financial crisis or lose your job, at least you have a home that you can call your own.

But many people are starting to oppose this conventional line of thinking – especially those in the younger generations.

Residential property prices in Singapore are among the highest in the world. Buying a flat requires you to put up a great deal of money as an initial down payment.

You would also need to borrow an enormous amount from the bank. It is likely that you will take several decades to pay off your loan.

Borrowing to buy a home can mean that you will carry a financial burden for the rest of your working life. A large part of your salary will go towards paying your monthly loan instalments.

Renting a home could be a better option. Currently, the rental market in Singapore favours tenants and it is relatively easy to find a suitable flat at a reasonable rent.

But the rent that you pay every month is an expense that does not create any value. On the other hand, if you buy your own home, every monthly instalment that you pay to the bank contributes towards repaying the principal amount of the loan.

Over a period of time, you will repay the entire loan amount and become the owner of a home that is worth a significant amount of money.

So, which is better, buying or renting? Let us consider the current situation in Singapore.

 

Will rentals go up in the near future?

The rental index for private residential properties in Singapore published by the Urban Redevelopment Authority has been in decline since the third quarter of 2013. The base of the index has been set as the first quarter of 2009. In the fourth quarter of 2016, the index was at a level of 104.5, indicating that in the last eight years it has gained a mere 4.5%.

Source – URA

Having declined continuously for the last three years, will rentals now start looking up? While this is a possibility, it is highly unlikely.

According to Urban Redevelopment Authority (URA) data, there were 50,548 private residential units in the pipeline at the end of 2016. Of these, 23,041 remain unsold. (Pipeline units indicate that they are currently under completion.)

The vacancy rate for private residential units stands at 8.4%. Large numbers of private properties are available for rent, providing tenants with the opportunity to get great bargains in the rental market.

 

Will property prices fall?

An important incentive for those who consider buying residential property instead of renting it is the prospect of capital appreciation. If the flat that you have purchased increases in value, you have the option of selling it and making a substantial profit.

Remember that this possibility is normally restricted to those who have bought an investment property. An individual living in the home that has been bought will usually be unwilling to sell it.

However, in the recent past, the situation in Singapore has been quite different. Residential property prices have been going down instead of rising.

In the fourth quarter of 2016, URA’s private residential index registered a decline of 0.5% compared to Q3. This was the 13th straight quarter of falling property prices.

Source: Bloomberg

What do consistently falling prices mean for an individual who has bought a residential property? Unfortunately, when prices fall, the loan amount that had been taken from the bank at the time of buying the property, remains the same. A borrower is effectively paying off a loan on an overvalued asset.  

This is an important disincentive for those considering buying a residential property.

 

Buying a home can restrict your flexibility

A home loan usually has a tenure of 20 years or 30 years or even more. By taking a loan for such a long period you are assuming that you will continue to earn at the current or higher levels till you are well into your 50s or 60s.

What if your health deteriorates and you are unable to continue working at the same job? The company that you work for could implement a retrenchment program and you could be laid off.

If your earnings go down, you would be much better off if you lived in a rental flat. As soon as the lease gets over on your current flat, you could move to a smaller home. You could even move to an equally large home in a distant suburb where rents are lower.

But if you live in your own home, it would be much more difficult to make any changes. Selling a residential property is difficult even in normal circumstances. In a declining property market, you would probably need to accept a price that is lower than the amount that you had originally paid.

 

A difficult decision

Should you buy a home or should you rent? Although this is never an easy decision, the answer lies in carefully considering your financial situation. If you have surplus funds and are confident about your ability to repay your home loan, buying may a better choice.

But with the property market in Singapore showing no signs of revival, you may be better off by taking a decision to rent your home. You could make your purchase at the time when the market changes direction and starts climbing.

(By Ravinder Kapur)

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