You may find it odd that some of your friends or relatives are choosing to rent their homes although they can afford to buy their own place. Being born and bred in Singapore, buying a BTO or resale HDB with your loved one is almost a rite of passage for many Singaporeans. In fact, it is unsurprising that you find it odd since home ownership in Singapore is 91%. However, countries like Hong Kong and Switzerland can have homeownership rates as low as 51% and 43% respectively.
Why People Buy Property Instead Of Rent
There are many reasons that people choose to buy rather than to rent but one of the primary reasons is that many people think that it is almost always cheaper to buy rather than to rent in the long run.
There has been a lot of talk in the press recently regarding the leasehold status of HDB flats. After the lease term, HDB flats have to be returned to the government. What this means is that HDB home buyers are actually leasing these properties till the remaining lease term runs out but paying for these properties over the duration of the mortgage term.
That said, if you are buying an HDB flat to live in, it will always be cheaper to buy rather than rent the property outright for 50 years till you die because HDB rental yields are relatively higher, up to 5% and this will likely be more than the monthly instalment (principal + interest) that you pay monthly for 30 years.
As an investment, HDB flats still make an excellent choice if you had another property to live in. If the rental yield of an HDB flat is 5%, it means that you can recover the cost of the flat in 20 years. If the remaining lease is 80 years, there is a potential to make 4x your money excluding interest charges. If you did take a mortgage for your HDB flat and decided to rent it out, the surplus rent after paying mortgage interest can be used to subsidize the cost of renting or buying another HDB flat or private property.
Note that the example above disregards capital appreciation and transaction costs. If you were lucky enough to buy a unit at the [email protected] at the initial ballot, you will be looking at even greater gains.
Why People Rent Property Instead Of Buy
However, what if you intend to buy a leasehold private property like a condominium instead. Is it always cheaper to buy instead of rent?
If you are buying a property to live in, it is likely that the overall cost of paying for the property over a 30-year mortgage term will be more than the cost of renting the property for 50 years till you die.
Taking an average 90-year leasehold condominium that costs S$1.5m with an 80% mortgage at 2% over a 30-year term, you might be paying up to S$2.4m over 30 years including interest and conservancy charges but the cost of renting for 50 years till you die might be only S$1.8m assuming a rental of S$3,000 a month.
The excess amount of S$600k is the amount that you have prepaid for the remaining 40 years that you are going to pass to your descendants. If you had chosen the rental option, you would have the liberty of using the S$600k in your lifetime to enjoy a higher standard of living or invest in something else.
As the quantum of a private property is also higher than an HDB flat, the monthly installments and the amount of deposit locked up in the property are also higher so some people may face liquidity and cash flow concerns, especially with other liabilities.
In A Nutshell
To summarise, it is always better to buy an HDB flat if you intend to live in it. If you have more than one property including an HDB flat, it can also give you cash flow and capital gain upside. If you intend to buy a leasehold private property to live in, it may be worthwhile to consider renting the same property because rental yields of private properties are generally lower. The money that you save from buying the property can be used on improving your lifestyle or other higher yielding investments.
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