Home ownership may not always be the best option

April 15, 2017


SINGAPORE — Even if you have enough money for a down payment on a flat, deciding whether to buy can be difficult. Property prices have been sliding and may continue to decline, so renting may be better. On the other hand, you’ll pay money to a landlord if you rent and end up with nothing to show for it.

THE FINANCIAL DECISION

From a purely financial perspective, it may be better to rent than to buy. While the decision might be different if property prices start to rise rapidly, anecdotal analyses here and more detailed research abroad show that renting can be less expensive.

Writer for Singapore property portal 99.co Lynette Tan found, for example, that a buyer who purchased a condominium for S$1.5 million would have a total cost of ownership of at least $217,168 over four years, which is about S$55,000 more than renting. The price would need to increase to $1.63 million just to cover costs, so the homeowner might be better off renting unless prices rise more than 2 per cent per year.

Century 21’s Ku Swee Yong similarly wrote in The Edge that a buyer would spend S$220,461 over the four-year period from 2015 to 2019, while renting could cost just S$178,000. Unless demand for properties start to exceed the pace of construction, Mr Ku concluded, it is better to rent than to buy.



Broader-based studies in other countries reached similar conclusions.

In Australia, for instance, the Reserve Bank examined whether it costs more to own a home or to rent. While owning a home would be about as expensive as renting if real house prices grow at their historical average, they found, the average home buyer would be financially better off renting if prices grow more slowly.

Recently-published research by University of Melbourne economists Dominic Crowley and Shuyun May Li tracked whether it was better to purchase a property and sell it after 10 years or to rent and then invest the same amount into shares and term deposits, for each year between 1983 and 2005. While they found that buying a home emerged as the financially superior strategy in all but four years, they also said that timing is critical because prices can fall or stagnate and it is sometimes better to rent.

Although research in the US by online property portal Trulia found that households that pay a 20 per cent deposit and plan to move after seven years could save 37 per cent if they buy, that conclusion was based on an average home price of US$280,103, well below prices in Singapore. If prices rise above US$467,772 (S$653,898), which is still far lower than most private flats in Singapore, Trulia found that renting could be better.

Individuals in other countries also benefit from calculators and guidelines. Rent-or-buy calculators from US firms such as Bank Rate and Smart Assets enable consumers to plug in financial and lifestyle information, then to receive a suggestion about whether to rent or buy. Trulia developed a price-to-annual-rent ratio and concluded that a ratio of 1-15 indicates that it is better to buy while a ratio above 15 indicates that it is better to rent. While the tools were developed for a specific US market, consumers could consider testing them to see if they are useful.

THE EMOTIONAL DECISION

Beyond just the financial decision, however, emotional and lifestyle factors are often also part of the decision whether to rent or buy.

Singapore real estate agency Greyloft suggests, for instance, that it may be preferable to buy if you want predictable costs, the freedom to renovate and decorate the way you want, a positive return if prices go up enough, and a way to avoid the feeling that you’re paying for someone else’s mortgage. Renting, on the other hand, offers flexibility in trying out different neighbourhoods, avoids costs for maintenance and repairs, doesn’t require a down payment, and avoids losses if prices go down.

It can also be important to consider whether buying would put too much strain on your household finances, whether you expect to be in your current location long enough to ride out a drop in price, and whether you can make more money investing in other assets.

KEY DECISION FACTORS

If property prices are rising, the decision could be clearer. With both rents and property prices having fallen more often than risen in recent years, however, the decision can be complex.

If you’re buying your house for the enjoyment of ownership and expect to be there for a long period, it can still be preferable to buy a flat and renovate it the way you want. You’ll need to do a careful comparison of all the costs — including property taxes, insurance, condominium fees, maintenance, major repairs and other costs — and make sure you have sufficient funds.

If your decision is purely financial, however, the anecdotal calculations and studies show that renting may be preferable. Anyone who has uncertainties about the stability of their job or who is financially strapped may also benefit from renting rather than buying.

WHAT TO DO

While it is more common to buy than rent here and you may feel an urge to buy after watching friends purchase a home, it can be preferable to step back and make a considered decision rather than just follow the crowd. While you may still end up buying, you’re likely to be more comfortable with your decision if you spend time working out the costs and benefits, whatever you decide.