Renting Vs Buying A Home: Which Is A Smarter Choice?

The Singaporean dream is simple: own a car, have a family and own a property you can call home. Conventional wisdom in Singapore considers home ownership as one of the metrics of success. However, times have changed, and the home ownership dream is no longer what all Singaporeans strive for. Millennials (who make up the youngest group of home buyers and renters) have a different mindset and preference compared to the generation before them. This is not to say that all millennials do not still want to own a property. There is now a greater variety of groups with differing needs on renting vs buying.

The BTO Couples

Young couples who qualify for Build-to-Order (BTO) flats, especially couples who plan to have children in the not-so-distant future, should strive to obtain their own BTO flat. For this group, the advantages of owning a property far outweigh the disadvantages. BTO flats are heavily subsidized by the government, and couples can even get additional grants on top of the already subsidized price. In the long run, even ignoring resale capital gain, buying the property is less costly than renting the exact same property.

Couples are able to use funds from the Ordinary Account (OA) of their Central Provident Fund (CPF) to pay for their flats, ensuring that mortgage payments do not eat into their disposable incomes. Additionally, using OA funds to purchase a property is a more lucrative investment eventually, because the property will most probably yield a much higher annual return compared to the 2.5% offered by the CPF OA.

Apart from financial considerations, there are also practical advantages of owning a property. Owning a property gives a sense of security and rootedness, which is important especially if the couple has children. Research by the MacArthur Foundation shows that constantly moving house may take a toll on the emotional wellbeing of children. Although this effect is likely to be muted in Singapore, since Singapore is such a small country, it does not change the fact that it is better for children to grow up in a familiar environment. Therefore, the flexibility of location offered by renting property is irrelevant to this group of people.

The Hip Singles

The average age at which Singaporeans tie the knot has been steadily rising, and an increasing number of young adults are now choosing to remain single. Single Singaporeans have traditionally continued to stay with their parents, especially since they are only able to purchase a Housing and Development Board (HDB) flat at 35. However, this is no longer the case for millennials.

In fact, many young adults who have just started their first job are choosing to move out and stay on their own, reflecting a significant change in social attitudes. Millennials value the sense of freedom and independence of having their own space. The cool and hip bachelor/bachelorette lifestyle is also particularly attractive to millennials, and many would love to stay in a trendy apartment near or in town. With ballooning disposable incomes, single millennials are more than capable of renting such apartments.

The Modern Couple

Increasingly, some young couples (although not the norm) are choosing not to have children. Similarly for this group, a smaller but definitely much swankier apartment in Dhoby Ghaut would be more appealing than a 5-room BTO flat in Punggol. Not having children would mean a much higher disposable income, and also no need for setting aside money for a child’s education, living expenses and inheritance. Renting vs buying? Renting absolutely makes sense for such a couple, as they will be able to stay in a more fashionable location at a much lower cost, leaving the rest of their money for shopping and overseas holidays.

Entrepreneurs And The Gig Economy

Startups are undoubtedly an essential part of the Singaporean economy, and the government has been rolling out initiatives to encourage local entrepreneurship. With the advent of the gig economy, more millennials have become freelancers or even digital nomads. For entrepreneurs and freelancers, the flexibility afforded by renting property is crucial because of the nature of their work.

Starting your own company can be a massive task, and it is not uncommon that the financials of entrepreneurs run in the red for the first few years. Being tied down by a mortgage is definitely not ideal for an entrepreneur. Also, having to pay the down payment for a house represents a significant loss of funds that could have been channeled into their businesses. The incomes of entrepreneurs and freelancers tend to fluctuate, so renting will allow them to easily upgrade or downgrade, whereas mortgage payments are fixed and the inability to service the payments may result in penalties. Additionally, the CPF contributions of the self-employed are generally much lower than corporate employees, so being unable to use their CPF funds is not a notable disadvantage for this group of people.

This group also tends to be more mobile. The work of an entrepreneur or freelancer may take him all over Singapore or even overseas, and the freedom to move around quickly is an advantage of renting vs buying. Owning a property in Singapore will not make sense if you have to live and work in Indonesia for the next 3 years.

Renting vs Buying: How Are Investors Affected?

Currently, the rental market is experiencing a down cycle because of lessening demand from expats. However, the rental market is poised for change, with local demand rising to potentially match expat demand, which has traditionally driven the Singapore rental market.

As times evolve, and Singaporeans become more open to the idea of renting instead of owning property, this represents a lucrative opportunity for property investors. After all, the rental market is the backbone of the property market and increasing demand for rental property will translate into higher yields for property investment. Singaporeans have always favoured investment in property because of its tangibility, versus shareholding.

Additionally, property investors can take advantage of leveraging by taking up a mortgage. It is essential to engage a good property agent and mortgage advisor. A good property agent will ensure that the property yields the highest rental rates, with little downtime, while a good mortgage advisor will ensure that the investor takes on a mortgage with the lowest interest rates, representing significant cost savings. As a result, investors need not worry about mortgage payments, because the rental income will cover the mortgage payments.

Sean Yeo
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