Renting can be a viable alternative to owning a private home in Singapore

Oct 18, 2021

Leslie Yee

HOME ownership is deeply ingrained in the minds of Singaporeans. Around 88 per cent of resident households own their homes as at 2020.

Subsidies and grants help locals to own HDB flats and have a direct stake in the country's prosperity.

For many older homeowners, the HDB flat or private home is a key asset for funding retirement needs or passing down to the next generation.

Tales abound of fortunes that are made from owning private homes here, which are seen as solid investments.

A few months back, I was challenged with the view that permanently renting instead of buying a private home can make sense.

On running a high-level simulation, I derive an outcome where financially the difference between renting and buying is negligible.

I use a 60-year timeframe for a couple aged 30. In Singapore, the median age of first marriage for males and females was 30.4 years and 28.8 years respectively in 2020. Life expectancy at birth for residents is around 84 years.

I compare buying a home worth S$2 million with renting a unit starting at S$3,500 per month, which is 2.1 per cent per annum on S$2 million.

For the buy scenario, I assume funding by cash of S$600,000 for the purchase and a further S$100,000 for stamp duty and minor works. A loan of S$1.4 million, being 70 per cent of the purchase price, is taken up at an interest rate of 1.7 per cent per annum over 25 years. Assumed interest rate is higher than initial rates available on home loans today to provide buffer for interest rate increases.

The property's value is assumed to rise at 2.2 per cent annually over the 60 year period.

Referencing the flash estimate of private home prices for third quarter 2021 provided by the Urban Redevelopment Authority (URA), the assumed growth rate is the simple average of the compound annual growth rate (CAGR) of prices over the last 10 and 20 years of 1.2 per cent and 3.2 per cent respectively.

I factor annual recurring costs of 0.5 per cent of the purchase price to cover condo management fees, property taxes and some minor repairs, and grow this at 1.3 per cent annually, which is in line with the CAGR of the consumer price index over 2010 to 2020.

In the rent scenario, the rental rate is assumed to rise at 1.8 per cent annually, which is set at a mid-point between assumed housing price growth and inflation.

I then assume that S$700,000 of cash available is invested in real estate investment trusts (Reits), which generate a constant yield of 4.5 per cent and unit price appreciation of 3 per cent per annum. In short, investing in Reits is assumed to produce an annual total return of 7.5 per cent.

Over a 5-year period till end-September, the iEdge S-Reit Index, which is regarded as Singapore's benchmark Reit index, grew at a CAGR of 2.9 per cent. The narrower iEdge S-Reit Leaders Index, which tracks performance of the more liquid Reits, grew at a CAGR of 3.4 per cent.

Larger cap Singapore-listed Reits are generally trading at distribution yields of around 4-5 per cent or more.

Under the buy scenario, the property's value reaches S$7.2 million in 60 years. Net off the S$1.7 million in repaying the loan including interest costs and S$0.9 million in recurring costs over 60 years, and the net gain is S$4.6 million.

In the rent scenario, the portfolio of Reits sees its value rise to S$4 million and generates S$5.1 million in distributions over 60 years. Net off total rental expenses of S$4.5 million and the net gain is S$4.6 million.

One can play with the assumptions, which will alter the results, or re-work the simulation to price in the present value of the returns generated.

The need by a homeowner to bear major capital expenditure occasionally or by a tenant to incur relocation costs of moving from one unit to another are excluded.

Also, a home buyer who uses funds from the Central Provident Fund (CPF) to help service the loan, would forgo the interest rate of 2.5 per cent per annum or more that monies kept in the CPF account earns.

While there is a frenzy to buy a private home, the simulation shows that being a private homeowner may not trump being a long-term residential tenant.

In the private home market here, prices rise over the long haul but not in a straight line. The market has cycles, so the size of gains is hugely impacted by when a purchase is made.

Based on the URA's private home price index, someone buying a home in mid-2013 may have had to wait until late last year in order to secure a capital gain. But, someone buying in the first half of 2017 may now be sitting on a gain of over 20 per cent.

Also, some homeowners can get a premium of 20 per cent or more compared with selling individually where a collective sale is successful.

Numbers aside, one may weigh the flexibility of being a tenant versus the security of owning one's home.

For a tenant on a fairly typical 2-year lease, moving home, should construction works on a nearby upcoming MRT station prove unbearable or the need for more space arise due to a new addition to the family, can be done fairly quickly and easily.

An owner can sell his private home after holding the property for at least 3 years to avoid paying Seller's Stamp Duty. But stamp duty in the range of 3-4 per cent will be incurred when buying a new home.

For a young couple, what is the ideal home may go through several iterations over a time frame of 50 to 60 years.

With young children, staying near a particular primary school may be crucial as the proximity of one's home can help snare a prized place in the school. As the couple reach their fifties, staying close to a major nature park can help facilitate leading active lifestyles. Later on, being in an integrated development so as to have easy access to retail amenities, or being close to healthcare facilities, or being near a place of worship may be crucial.

While moving homes can be easier for a tenant, there can be occasions when a tenant has to move home involuntarily. The landlord may want to take back a unit to sell, for own use or to lease out at a much higher rate.

Owning a home gives one control over renovating the unit, subject to prevailing regulations, and the security of not being forced to move, except if one is a strata owner in a development where the vast majority chose to pursue a collective sale.

Demographic trends here include an ageing population and a falling fertility rate. Would couples without children and singles be more open to renting? As people age, would they want to have funds tied up in property? What about the security of owning a hard asset and the comfort of being able to age in place in one's own home?

Many aspire to be private home owners and some fear missing out as home prices rally.

But owning a coveted private home need not be financially optimal, especially if one is disciplined and savvy in investing to grow one's wealth. And preferences between owning and renting will evolve as household and population composition changes.

While the pandemic and digitalisation reinforce the need for comfortable abodes, the choice to buy is no longer the default conclusion.

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