Should You Buy or Rent a Property in Singapore?

By SUSAN TEO and PAUL HO

 

Many factors come into play when deciding between buying or renting a property in Singapore. The booming rental and sales market in the island suggest that people are always on the search for living spaces. What then are the factors that property buyers should consider when choosing between the two?

Level of commitment

Renting a house as opposed to buying provides people with more freedom to relocate. The moment the rental contract expires, you can move. Any move before that is possible, but that will mean the forfeit of your deposit.

At times you may find your neighbourhood or neighbours to be unsuitable, renting allows you to uproot easily.

For some people, renting is a lifestyle option because it gives them the flexibility of changing their living environment and homes every now and then.

In contrast, buying a house requires more commitment as people are unlikely to move every few years due to the cost of selling and buying. For example, if you are financing your house with a loan, you have to incur a penalty for early repayment. Not to mention the agent fees and administration costs involved. Most importantly, there may be capital losses if you are selling during a property slump!

Nevertheless, having a place you can call your own brings with it benefits. You can experience pride in being the proud owner of a beautiful house. You also have every right to renovate it as your taste dictates and your pockets allow (or let it fall into a decrepit state if you so wish!).

Down-payment

Besides intangible considerations, the more practical concern for most is the financial aspect.

A housing purchase is a major financial commitment. Most people have to spend their entire working life, or even beyond, to pay off their mortgage.

But even before being eligible for that housing loan, you have to come up with the down-payment. If you opt for a HDB flat, unless you are eligible for a HDB concessionary loan, you will have to pay 5% or 10% of the purchase price in cash. Using of CPF fund to pay for this component is not allowed. Do note that when buying a HDB flat, whether on the open market or a direct purchase from HDB, not everybody is eligible for a HDB concessionary loan. Hence, taking a loan from a private financing institution becomes the next alternative.

For private properties, mortgage financing by a private institution is the only choice. Identical to a purchase for a HDB flat using a private loan, you will have to stump up a cash component for the down-payment. With no existing home loan, this will be 5% or 10% (if the loan tenure exceeds 30 years or extends beyond age 65) of the purchase price. With an existing loan, it jumps to 25%.

Raising the cash component of the down-payment proves to be a stumbling block for many, particularly for younger people.

Thus, renting becomes an option when you want to have a place to live in, but you are unable to stump up the cash for the down-payment to buy a house.

In another scenario, you have the means to pay for the down-payment, but you have a more lucrative investment compared to a housing purchase. As a result, you prefer to rent instead of buying. In such a case, you will have to carefully weigh whether your investment will reap you a higher capital gain than a house.

 

A concrete illustration of the cost of buying vs renting

To compare the cost of renting and buying, we will proceed to use real data; namely the median rental and sale price of Beacon Heights at Mar Thoma Road.

Table 1: BEACON HEIGHTS

	Period	S$ psf	(Assuming a size of 1000 square feet) S$
Median Selling Price	Sept' 12	851	851,000
Median Rental	3Q12	3.796916	3,797

Source: URA Real Estate Information

Using the median S$ psf from URA, we assume a 1000 square feet apartment to work out the median selling price and rental.

Cost of renting

Table 2: Renting a 1000 sq feet unit at Beacon Heights

 

	3Q12 Median Rental (S$)	+ 30% (S$)	- 30% (S$)
Monthly Rental	3,797	4,936	2,658
Monthly Maintenance Fee	400	400	400
Total Annual Cost	45,963	59,632	32,294

As rental changes over time, we include the scenarios when it rises or falls by 30%.

Cost of renting over a 3-year period

Table 3: Renting a 1000 sq feet unit at Beacon Heights for 3 years

 

	3Q12 Median Rental (S$)	+ 30% (S$)	- 30% (S$)
Total Cost	137,889	178,896	96,882

Cost of buying

Table 4: First-Year Cost for Buying a 1000 sq feet unit at Beacon Heights

 

	Scenario 1	Scenario 2	Scenario 3
Price (S$)	851,000	851,000	851,000
Down-payment (S$)	170,200	170,200	170,200
Stamp Duty (S$)	15,024	15,024	15,024
Loss of Interest on Down-payment and Stamp Duty	1%	1%	1%
A - Opportunity Cost (S$)	1,852	1,852	1,852
Loan Quantum (S$)	680,800	680,800	680,800
Interest Rate (p.a.)	1.5%	2.5%	3.5%
B - Annual Interest Payment (S$)	10,212	17,020	23,828
C - Annual Maintenance Fee (S$)	4,800	4,800	4,800
D - Owner-occupier Property Tax* (Estimated) (S$)	1582.56	1582.56	1582.56
Total Annual Cost (S$) (A + B + C + D)	18,446.56	25,254.56	32,062.56

*To learn the computation, go here.

Cost of buying over a 3-year period

Table 5: Buying a 1000 sq feet unit at Beacon Heights for 3 years*

 

Interest Rate (p.a.)	1.5%	2.5%	3.5%
Year 1 Interest Payment (S$)	10,212	17,020	23,828
Year 2 Interest Payment (S$)	9,940	16,207	22,532
Year 3 Interest Payment (S$)	9,515	15,414	21,283
Total Interest Payment (S$)	29,667	48,641	67,643
Total Opportunity Cost (S$)	5,556	5,556	5,556
Total Maintenance Fee (S$)	14,400	14,400	14,400
Total Property Tax (S$)	4,747.68	4,747.68	4,747.68
Grand Total (S$)	54,370.68	73,344.68	92,346.68

*Assumes that interest rates are fixed for the 3 years  

Savings from buying a house versus renting (3-year horizon)

Table 6: Cost saving from buying (3-year horizon)

Interest Rate (p.a.)	1.5%	2.5%	3.5%
A - Rental (S$)	137,889	137,889	137,889
B - Total Buying Cost (S$)	54,370.68	73,344.68	92,346.68
Savings (S$) (A-B)	83,518.32	64,544.32	45,542.32

So it would seem that there will definitely be savings from buying a house compared to renting. Is that really the case?

If property prices stayed stagnant, that would definitely be the case. However, prices of properties tend to fluctuate.

Currently, the asking price for units at Beacon Heights range between S$1,000 to S$1,300. Hence if you happen to buy at S$1000 instead of S$851, the cost saving will be substantially lower.  

Read more articles at  

PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

The Pricing Impact of a Change in Down-payment Amount in Housing Loan

By SUSAN TEO

From an economic perspective, any change in credit conditions will have an impact on demand thus bringing about a change in market-clearing price and (or) sales volume. Down-payment forms an essential component in the financing of a property purchase. In the Singapore's context, for residential property purchases, down-payment is funded by cash and (or) Central Provident Fund balances. This implies that a raise in down-payment as a percentage of the purchase price [equivalent to a lower loan-to-value ratio (LVR)] will lead to, ceteris paribus, a decrease in demand for residential property. Intuitively, the decreased demand is spurred by the greater number of buyers exiting the market. Generally, for first-time buyers accumulating the savings needed for down-payment constitute a major hurdle in property purchases hence a lower LVR will deter this group of buyers from making purchases. Repeat buyers who wish to upgrade or purchase another property will be hesitant to do so thus depressing demand.  
 

A Look at the Effect of a Change in Down-payment Percentage

Using a simple demand-and-supply analysis, we will illustrate the dynamics of an increase in the down-payment percentage. We assume the classic case of a downward-sloping demand curve and an upward-sloping supply curve. On the supply side, the key determinant of the magnitude of change in market-clearing price and sales volume is the price elasticity of supply. This parameter measures the relative responsiveness of quantity supplied due to a change in the price of the good itself, ceteris paribus.

For simplicity, we omit the two extreme cases of a perfectly price elastic supply (PES= infinity) and a perfectly price inelastic supply (PES=0).

S_I is the supply curve that is relatively price inelastic (PES < 1)
S_E is the supply curve that is relatively price elastic (PES > 1)

Figure 1 shows that when down-payment rises, ceteris paribus

i) the demand curve for property shifts to the left from D₀ to D₁
ii) there is a decrease from the initial market-clearing price of $1000 psf and sales volume of 25000
iii) the magnitude of decrease in market-clearing price and sales volume is contingent on the price elasticity of supply
iv) when the supply curve is relatively price elastic, S_E,the market-clearing price and sales volume decrease to $800and 20000, respectively.
v) when the supply curve is relatively price inelastic, S_I,the market-clearing price and sales volume fall to $600 and 23000, respectively.

Hence we can conclude that if supply is relatively price inelastic, the decrease in market-clearing price is steeper, but the fall in sales volume will be smaller. In the short run, it is realistic to believe that the supply of housing is relatively price inelastic as property developers cannot quickly adjust supply in response to demand changes. For example, developers are unlikely to put off property launches that have been planned before the fall in demand. In contrast, in the long run, developers can reduce the construction of new property; consequently supply becomes more elastic.
 

In the Singapore's Market Context

Relating this economic analysis to the Singapore's residential property market, we do observe the Government implementing cooling measures aimed at increasing the down-payment percentage. Since Sept 2009, the Government has made six legislative attempts to stabilise soaring property prices, with the latest, on 6 October 2012, being the further decrease of the Loan-To-Value ratio (LTV) for longer term loan. (With the new regulation and the weak economic climate, you will want to optimise your financial resources when applying for new home loans or refinancing your current one. Do make use of the free mortgage advisory service at www.iCompareLoan.com to find the best home loan in town that will serve your needs.) Among the slew of measures, four specifically target an increase in the down-payment component.

Chart 1: Cooling Measures that Affect the Down-payment

Date	Policy Change
19 Feb 2010	Lowering of Loan-To-Value ratio (LTV) from 90% to 80%.
30 Aug 2010	Increase in Minimum Cash Deposits from 5% to 10% and a Decrease in Loan-To-Value ratio (LVR) to 70% for Property Buyers with Outstanding Housing Loans.
14 Jan 2011	Further Lowering of Loan-To-Value ratio (LVR) to 60% for Property Buyers with Outstanding Housing Loans.For Non-Individuals Borrowers, Lowering of Loan-To-Value ratio (LVR) to 50%.
6th Oct 2012	For Loans Exceeding 30 Years or Which Extend Past the Age of 651) Further Lowering of Loan-To-Value ratio (LVR) to 60% for Property Buyers Taking their First Housing Loans.2) Further Lowering of Loan-To-Value ratio (LVR) to 40% for Property Buyers with Outstanding Housing Loans.For Non-Individuals Borrowers, Further Lowering of Loan-To-Value ratio (LVR) to 40%.

Source: CPF, Singapore SIBOR Watch, The Straits Times

Based on then Minister of National Development, Mr Mah Bow Tan, in the Committee of Supply Debate speech delivered on 3 March 2011, the four rounds of cooling measures have proven effective in reining in prices. (See below two figures) "Resale price growth and transaction volumes have moderated. Quarter-on-Quarter growth in resale prices slowed from 4.0% in the second and third quarters of 2010 to 2.5 per cent in the last quarter. For 2011, month-on-month, resale price growth has slowed to 0.6 per cent in Jan and 0.7 per cent in Feb. The trend is still downwards. Likewise, quarterly resale volumes fell by 21 per cent to about 6,500 transactions in the last quarter of 2010, or about 2,200 transactions each month," Mr Mah said.
In addition, according to Ku Swee Yong, CEO of International Property Advisor Pte Ltd, in his evaluation of the first four rounds of cooling measures commented that the "The tightening of the loan-to-value (LTV) ratio from 70 per cent to 60 per cent had the largest impact on market volume" (page 37). To counter the series of stringent measures, property developers have come up with various cashback schemes to woo buyers. Among which includes dishing out furniture vouchers and early birds discounts.


Read more articles at  

PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

References

1.Ku Swee Yong, Real Estate Riches: Understanding Singapore's Property Market in a Volatile Economy, Singapore: Marshall Cavendish Business, 2011, 37, Print

2. "35-year Limit Set on Home Loans", The Straits Times 6 Oct 2012, sec 1: 1, Print

3."my CPF - Buying a House. . . A Place to Call Your Own", Central Provident Fund Board, Web <http://mycpf.cpf.gov.sg/CPF/my-cpf/buy-house/BH5.htm>

4."Summary of Property Cooling Measures", Singapore SIBOR Watch, Web <http://singaporesiborwatch.com/singaporesibor-learning-centre/summary-of-property-cooling-measures-imposed-by-the-singapore-government/>

5. Speech by Minister for National Development, Mr Mah Bow Tan, at the Committee of Supply Debate on "Stability - Responding to extraordinary growth", 3 March 2011, Web <http://app.mnd.gov.sg/Newsroom/NewsPage.aspx?ID=2381&category=Parliamentary%20Speech&year=2011&RA1=&RA2=&RA3=> Images/Charts for Speech by Minister for National Development, Mr Mah Bow Tan, at the Committee of Supply Debate on "Stability - Responding to extraordinary growth", 3 March 2011, Web <http://www.mnd.gov.sg/BudgetDebate/bavr2011-photo01.html>